Document of The World Bank FOR OFFICIAL USV! ONLY Report No. 6146-STP STAFF APPRAISAL REPORT SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT flay 29, 1987 Western Africa Projects Department Agriculture D This document bas a resticted ditibution and may be used by recipients only in the performance of thewr official duties Its contents may na* othrise be disdosed without Wodd Bank authorzation. CURRENCIES Currency unit : Dobra (Db) 1985 1986 1987 a/ Average exchange rate: US$1.00 = Db 40 36 58 WEIGHTS AND MEASURES Metric System ACRONYMS AND ABBREVIATIONS AFVP Association Frangaise des Volontaires du Progres (French National Association of Volunteers for Progress) BADEA Banque Arabe pour le Developpement Economique de l'Afrique (Arab Bank for Economic Development in Africa) BNSTP Banco Nacional de Sao Tome e Principe (National Bank of Sao Tome and Principe) CCCE Caisse Centrale de Cooperation Economique (Central Fund for Economic Cooperation, France) ECOMEX Empresa de Comercio Externo (Foreign Trade Organization) ECOMIN Empresa de Comercio Interno (Internal Trade Organization) EEA Empresa Estatal Agro-Pecuaria (State Enterprise for Agriculture and Livestock) FAC Fonds d'Aide et de Cooperation (Aid and Cooperation Fund, France) ICE Instituto de Cooperacao Economica (Portuguese Institute for Economic Cooperation) IFAD International Fund for Agricultural Development IRCC Institute de la Recherche du Cafe et du Cacao (Coffee and Cocoa Research Institute) MADR Ministerio de Agricultura e Desenvolvimento Rural (Ministry of Agriculture and Rural Development) MP Ministerio do Plano e Comercio Interno (Ministry of Planning and Domestic Trade) OPEC Organization of Petroleum Exporting Countries Fund POTO EstaCao Experimental Agronomica (Agricultural Experimental Station of POTO) PSU Project Support Unit STP Sao Tome and Principe USAID United States Agency for International Development WFP World Food Programme FISCAL YEAR Government: January 1 - December 31 a/ Projected annual average. TOR OFFIUCL USE ONLY SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT TABLE OF CONTENTS Page No. DOCUMNNTS CONTAINED IN THE PROJECT FILE ....................... iii CREDIT AND PROJECT SUNMARY ....... . ..** ..................*.. v I* BACKGROUND I 1 A. Introduction .................*..... * ******.*,. 1 B. The Economy ...................................... I C. Agriculture Sector Issues and Strategy .............. 3 II. THE COCOA SUBSECTOR ..................... 4 A. Historical Context 4............................... 4 B. Production Environment ...... ....... ................. 5 C. Main Institutions .*........ 6 D. Cocoa Subsector Strategy ............................ 7 E. Rationale for Bank Involvement ...................... 7 III. THE PROJECT 7 A. Project Objectives and Scope ...n.......*......... 7 B. Summary Description ..................... ..... ..... 8 C. Detailed Features 9...............................*. 9 1. Plantation Development ...... .................... 9 2. Support to the Agriculture Sector with Emphasis on the Cocoa and Food Crop Subsectors ......s.. 13 D. Project Costs and Financing ......................... 18 E. Accounts and Audits ............... .............. 20 F. Procurement and Disbursements ....................... 21 This report is based on the findings of an appraisal mission undertaken in September/October 1985 by a team consisting of MW. Falloux, Ms. Kawabata, Ms. Morin and Mrs. Mattson (Bank staff), and on the findings of a subsequent mission carried out in November 1986 by Ms. Kavabata, to reassess the viability of the project in the context of macroeconomic measures to be taken by Government and to update project information. The report was prepared by Ms. Kawabata with the assistance of Mrs. Vali'i1. i; data processing, edited by Mrs. Layton and Mrs. Reza, and typed by Ms de Paula Carvalho. This document ha a stricd distributin and may be used by rcipents only in the peformane of thei officia dute. Its contens may not otherwis be dcscked without Word Bank authorizaon. - ii - TABLE OF CONTENTS (continued) Page No. 6. Implementation and Organization .................... 23 1. Preparatory Activities ........................ 23 2. Project Management and Coordination ............ 23 3. Nanagement of Bela Vista and Uba Budo EEAs ..... 24 4. Interim Review .......... 25 R. Production. Markets and Prices ..................... 25 I. Financial Results .. ............................. 26 J. EconGmic and Social Benefits and Risks ............. 30 IV. AGRZMENTS REACHED AND RECOMNENDATION ................... 32 ASN 1 Typical Organization Chart for a State Enterprise for Agriculture and Livestock (EEA) 2-1 Historical Events 2-2 Production Constraints 2-3 Main Iustitutions 3-1 Bela Vista EEA 3-2 Uba Budo ERA 3-3 Main Features of Management Contracts 3-4 Technical Production Parameters 3-5 Terms of Roderenee for Consultancy Services and Studies 3-6 Project Costs Summary 3-7 Estimated Schedule of Credit Disbursement 3-8 Organizational Arrangements for Project Support 3-9 Cocoa Prices 3-10 Bela Vista Projected Income Statements and Cash Flow 3-11 Uba Budo Projected Income Statements and Cash Flow 3-12 Government Cash Flow MAP: IBRD 19574. - iii - SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT DOCUMENTS CONTAINED IN THE PROJECT FILE Code No. A. Selected Reports and Studies on the Country Al. Analysis of the World Cocoa Market, by Takamase Akiyama and Ronald C. Duncan, World Bank Staff Commodity Working Papcrrs No. 8, June 1982. EPDCS A2. Democratic Republic of Sao Tome and Principe, Recent Economic Developments, Inernational Monetary Fund; October 30, 1984. 228.955 A3. La Recherche Agronomique A Sao Tome et Principe, Rapport de Mission, by Gora Beye; 9-16 Avril 1985. 228.956 A4. Line of Credit for Economic Rehobilitation and Modernization; April 17, 1985. P-4028-STP AS. Sao Tomf et Principe: Revue du Secteur Agricole, STP - Ag. Sector, by C. Agel; August 1985. B/R-Oct. 85 A6. Sao Tome and Principe: Issues and Options in the Energy Sector, UNDP/World Bank; October 1985. 229.381 A7. Table Ronde des Partenaires du D4veloppement, Consultative Group, Vol. 1 & 2, Ministere de la 228.957 Coop4ration; D6cembre 1985. (1+2) A8. Cocoa Production: Present Constraints and Priorities for Research, by R.A. Lass and GAR Wood, Ed., World Bank Technical Paper No. 39; 1985. 1 PUBSU A9. Sao Tome et Principe: Projet de DAveloppement des Cultures Vivriares et Frutieres (Prepare par FAO pour BADEA); 7 Octobre 1986. D00795 A10. Sao Tome and Principe: Structural Adjustment Credit - President's Report, World Bank; May 1987. (Corr.) All. Projet de Developr-ment des Olagineux, FED, undated. 228.958 B. Selected Reports on the Project B1. Sao Tome et Principe: Rapport d'Identification GUndrale 42/84 GV-STP, FAO; 3 Mai 1984. 228.959 B2. Demonstracoes da PosiCao Financeira Pro Forma, Price Waterhouse; December 31, 1984. 228.960 B3. Oferta Tecnica, Price Waterhouse; December 1984. 228.961 B4. Sao Tome y Principe: Proyecto de Rehabilitacion del Cacao - Mision de Preparacion, FAO; February 4, 1985. 226.457 B5. Mission pour l'Evaluation de la Pourriture Brune des Cabosses du Cacaoyer et pour la Connaissance de l'Evolution de lInfection au Champ a Sao Tome, by G. Blaha; 6 May-5 June 1985. 228.962 B6. Mission d'Appui pour l'Estimation des Besoins en Engrais, by P. Jadin; 4 June-3 July 1985. 228.963 - iv - DOCUMENTS CONTAINED IN PROJECT FILE (continued) Code No. B7. Relatorio Contendo ecomendaCoes sobre Controles Internos e Procedim%atos Contabeis, Price Waterhouse; June 1985. 228.964 B8. Relatorio da Niasao, Segmento FormaCAo Profissional, by Magalhaes; July 1985. 228.965 B9. Diario da Republica, S. Tome e Principe, ResoluCao N°1/85, Numero 10; 5 de Setembro de 1985. D00796 BlO. Programme de Recherche en Matiere de Cacaoculture pour le Court, le Moyen et le Long Terme en Republique Democratique de Sao Tome et Principe, Status de POTO, IRCC; September 1985. 228.966 Bl. Document Technique, by F. Falloux; November 1985. 228.967 B12. Relatorio da Deslocacao Efectuada A Republica Democ-atica de Sao Tome and Principe, Missao de Avaliasao, Instituto Universitario de Tras-os-Montes e Alto Douro, Portugal by Antonio Machado; December 1985. 228.968 B13. Methodologie et Note Explicative de la Carte des Potentialit6s Agricoles by BDPA; 1985. D00797 B14. Projet de R6habilitation de la Recherche Cacaoyere sur 228.969 la Station Agronomique de POTO, IRCC; March 1986. (1+2) B15. Complemento ao Relatorio da Deslocacao Efectuada a R.D. de S. Tome e Principe, by Alvaro Sousa; April 1986. D00798 B16. Project Uba Budo by SOCFINCO, France - B.D.P.A.; May-July 1986. D00799 B17. Reabilitacao da EEA Bela Vista, R.D. de S. Tome e Principe; Fase Preliminar do Contrato de Gestao by SCFMI; Nay 1986. D00800 B18. Projet Authorization: Trilateral Agricultural Training, USAID; September 9, 1986. D00801 B19. Diario da Republica, S. Tome e Principe, Resolucao N°10/86 (Agricultura de ExportaCao Alimentar e Pecuaria); Numero 19; 24 de Outubro de 1986. D00802 B20. Projet de Recherche d'Accompagnement de la Cacaoculture en R6publique de S. Tome et Principe, by CCCE; 29 Octobre 1986. bt.O803 B21. Diagnostic Composante Industrielle Empresa Bela Vista, by Vincent, undated. 228.970 B22. Diagnostic Composante Industrielle Empresa Uba Budo, by Vincent, undated. 228.971 B23. Contract and Bidding Documents of Sociedade Comercial, by Francisco Mantero, undated. 228.972 B24. Contract and Bidding Documents of SOCFINCO/JNEPA, undated. 228.973 B25. Recomendacoes para a Continuagao das Accoes do PRPC, by Champeroux, IRCC, undated. 228.974 B26. WFP, Assisted Project Sao Tome and Principe 2757, Rehabilitation of Cocoa Production, Technical Report, March 16, 1987. 228.975 B27. Sistema de Apuracao de Custos, Price Waterhouse, undated. 228.976 SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower, The Democratic Republic of Sao Tome and Principe. Beneficiaries: The Ministry of Agriculture and Rural Development; Bela Vista and Uba Budo State Enterprises; smallholders. Credit Amount: SDR 6.1 million (US$7.9 million equivalent). Financing Terms: Standard IDA terms. Cofinancing: Arab Bank for Economic Development in Africa (BADEA), International Fund for Agricultural Developm nt (IFAD), Central Fund for Economic Corporation (CCCE, France), Organization of Petrolcum Exporting Countries Fund (OPEC), U.S. Agency for International Development (USAID) and Portuguese Institute for Economic Cooperation (ICE), World Food Programme (WFP), and Aid and Cooperation Fund (FAC, France) and French National Association of Volunteers for Progress (AFVP). Project Description: The project would assist the Government in its efforts to achieve quick economic recovery through the increased production of cocoa and in reaching its longer term objectives for the development of the agriculture sector as a whole. To achieve these objectives, the project would, first, increase production and improve workers' social conditions in two cocoa plantations (Bela Vista and Uba Budo), and, second, reinforce STP's agriculture sector with emphasis on (i) the cocoa subsector by facilitating future financing of other plantations presently not receiving external assistance, and providing technical support and training; (ii) the food crop subsector by creating applied research capacities; (iii) supporting smallholders development; and (iv) addressing other issues through studies and consulting services. This latter element would assist the Government in formulating and implementing its policies, in diversifying its agricultural base, and in shifting the status of its state enterprises to that of mixed-economy enterpris,,. - vi - Estimated Costs (US$ million): % of Base Local Foreign Total Cost 1. Plantation Devel.pn_ent (a) Cocoa Production (i) Bela Vista 0.5 4.5 5.0 26 (ii) Uba Budo 0.6 6.3 6.9 36 (b) Labor Productivity (i) Bela Vista 0.4 0.6 1.0 5 (ii) Uba Budo 1 0.3 0.7 1.0 5 2. Support to the Agriculture Sector (a) Cocoa Technical Support 0.0 1.1 1.1 6 (b) Agricultural Training 0.1 0.9 1.0 5 (c) Food Crop Development 0.1 0.6 0.7 4 (d) Support to Other EREAs 0.1 0.6 0.7 4 (e) Smallholders 0.1 0.5 0.6 3 (f) Agricultural Studies and PSU 0.0 1.1 1.1 6 Total Baseline Ccots 2.2 16.9 19.1 100 Physical Contingencies 0.2 1.3 1.5 Price Contingencies 0.4 0.8 1.2 Total Project Costs 2.1. Financing Plan (US$ million): Food MuAID Support to PAC and Laborers and Total IDA BADA IFAD CCCE OPEC Portugal WFP AFVP GOVT. Costs 1. .a.tion De _v_l Be-la Vista (a) Production 2,3 1.4 - - 1.1 - 0.8 5.6 (b) Food crops - - 0.05 ^ - - - 0.1 - 0.1 (c) social Infrastructure - 0.4 - - - 0.3 - 0.3 1.0 Uba Budo (a) Production 3.8 3.6 - - 0.4 7.7 (b) Food crops - - 0.05 - - - 0.1 - 0.1 (c) Social Infrastructure - 0.4 - - - - 0.3 - 0.3 1.0 2. SuDDort to the Ag. Sector (2. Coeo TesSmlea1 Sup. 0.3 e - 1.0 - - - 0.1 0.1 1.5 (b) Agr. Training 0.2 - - - 0.9 - - 1.1 (c) Food Crop tow. 0.8 - - 0.9 (d) Sup. to Other ERAs 0.5 0.2 - - - - - - - 0.8 te) Swalholders 0.7 0.7 (f) Agr. Studies & PSU 0.8 - 0.3 - - - - 0.2 1.3 Total Financing ,2 L "2 LO L W £a W 2 & - vii - Estimated Disbursements (US$ million): IDA Fiscal Year 1988 1989 1990 1991 1992 1993 1994 1995 Annual 1.8 0.5 0.9 1.2 1.1 1.1 0.9 0.4 Cumulative 1.8 2.3 3.2 4.4 5.3 6.6 7.5 7.9 Benefits and Pisks: The immediate benefit of the project would be an increase In foreign exchange revenues from cocoa sales. There would be social benefits for some 1,500 workers whose living conditions would improve because of the project. The agriculture sector would benefit from project assistance both to plantations and amallholders, technical support for cocoa and food crop, training activities and studies. Equally important are the benefits that the project would bring in the medium- to long-term by laying the basis for a profitable cocoa industry as part of a well-diversified agriculture sector. There are no unusual economic or technical risks under the project. The project's economic viabllity ts moderately sensitive to a possible drop in cocoa prices, or to Increases in production costs. Some risk of lower than expected yields is involved with the planting of new high-yielding hybrids. To reduce this risk, replanting would be carefully phased and closely monitored by a scientific institution specializing in cocoa. The presence of foreign management firms would ensure the timly application of incentives in the two plantations and minimize this risk. Economic Rate of Return: The estimated overall Economic Rate of Return for the project is about 211. Mhp: IBRD 19574. SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT STAFF APPRAISAL REPORT I. BACKGROUND A. Introduction 1. The Government of the Democratic Republic of Sao Tome and Principe (STP) has requested IDA'3 assistance to finance a cocoa rehabilitation project which would support the revival of the cocoa industry, start the process of reforming agricultural state enterprises, and begin to diversify the agriculture sector. Project cofinancing has been arranged with the Arab Bank for Economic Development of Africa ("Banque Arabe pour le Developpement Economique de 1'Afrique" - BADEA), the Central Fund for Economic Cooperation ("Caisse Centrale de Cooperation Economique" - CCCE, France), the Organization of Petroleum Exporting Countries Fund (OPEC), the International Fund for Agricultural Development (IFAD), the U.S. Agency for International Development (USAID)/Portuguese Institute for Economic Cooperation (ICE), the World Food Programme (WFP), and the Aid and Cooperation Fund ("Fonds d'Aide et de Coop6ration" - FAC, France) jointly with the French National Association of Volunteers for Progress ("Association Francaise des Volontaires du Progr6s" - AFVP). 2. The project was identified by the Government and the Bank during an economic mission in January 1984. It was prepared by the Cooperative Program of the Food and Agriculture Organization (FAO/CP) after a visit to Sao Tome in October 1984. The preparation report is in the Project File (No. 226.457). Preparation was completed by .he Bank, and the project was appraised in September/October 1985 with the participation of representatives of CCCE and USAID/ICE. Due to a rapid deterioration of STP's economy, project processing was suspended until a review of the macroeconomic situation was carried out in November 1986. The Government agreed then to take measures that would restore the profitability of the cocoa sector, and it was agreed that the Project would be processed simultaneously with a Structural Adjustment Credit. Negotiations were held from 13 to 15 May, 1987. B. The Economy 3. General. The Democratic Republic of Sao Tome and Principe consists of two islands located in the Gulf of Guinea, about 300 km west of Gabon, covering a total area of 1,000 km2. The islands were discov2red in the late 15th century and colonized by the Portuguese until independence in 1975. The island of Sao Tome (857 km2) (Map IBRD 19574) concentrates 95% of the total population, estimated at 100,000 in 1981. The population is fairly urbanized (39%) and encompasses three main groups: indigenous Sao Tomeans (85%), Cape Verdeans and Angolans (15%). The country is endowed - 2 - with good agricultural resources, such as soils and microclimates suitable for the cultivation of almost all tropical products. Arable land totals 40,000 ha and a significant unexploited potential exists in fisheries and forestry. The microclimates make production conditions widely different from one area to another even within a plantation. Rainfall varies from 990 mm in the northeast of Sao Tome to 7,000 mm in the southeast. 4. A little over a decade after independence, the country faces its worst economuic and financial crisis. Cocoa production, which had peaked at about 36,000 tons in 1920, stood at an estimated 10,000 tons a year in 1975. Production further declined to 6,000 tons in 1980 and 4,000 tons in 1986. Cocoa represents 90% of export revenues, and GDP per capita declined by an estimated 30% in real terms. Both the Go;arnment deficit and the overall deficit of the balance of payments have averaged over 40% of GDP during the 1982-86 period. The debt service ratio increased from 6% in 1981 to an estimated 65% in 1986. 5. Although the sharp decline in cocoa production can be largely explained by -'actors inherent to the sector, four fundamental policy deficiencies have equally contributed to the present economic difficulties. They are: (a) an overvaluation of the exchange rate which has maintained import prices artificially low and eroded the viability of domestic production and exports, in particular cocoa; (b) expansionary monetary and credit policies to finance fiscal deficits, which have led, in the context of official price controls, to the surge of parallel markets and a reduction in real wages in the state farms, as well as a lack of wage goods; (c) an oversized public investment program of which only 5% has been oriented toward the cocoa sector between 1982-86; and (d) the lack of incentive policies for the productive sector and a wage structure that favors civil servants, and where cocoa workers are often not paid. 6. The fundamental objective of STP development strategy is to raise per capita income in real terms, first, through the rehabilitation of the cocoa production capacity, and second, through progressive diversification by developing other cash and food crops. Since 1984, the Government has decided to move toward a progressive liberalization of the economy. Wore recently a new investment code has been adopted and the Government has been actively seeking foreign private investment in various sectors. Following IDA's review of the country's economic situation, the Government has also decided to embark on a far-reaching program of macroeconomic adjustment which would ensure consistency among the exchange rate, monetary, public finance and incentive policies. These measures include a devaluation of the currency sufficient to restore the viability of the cocoa subsector. - 3 - 7. In an effort to mobilize support for its five-year Development Plan, the Government organized a UNDP-sponsored Round Sable Conference In December 1985, during which the participants noted the Government's increasing willingness to tackle macroeconomic issues such as the pricing system and the exchange rate policy. The private sector would be given a larger role in development in che coming years through the liberalization of economic activities. During the meeting, the participants also endorsed the Government's development strategy which centers on reforming the State Enterprises for Agriculture and Livestock ("Empresas Estatais Agro-Pecuarias" - EEAs) (organization chart in Annex 1) and on diversifying crop production. The Government's .ew approach to obtain loans on concessional terms from a more diversified group of donors has resulted in identifying projects with elements complementary to those of the proposed project. C. Agriculture Sector Issues and Strategy 8. Agriculture is the mainstay of STP's economy and provides the livelihood of about 70% of the population, generating approximately 30% of GDP and 90% of the country's exports. The most important subsector, cocoa, is described in Chapter II. Other cash crops include coffee, palm oil and coconuts, and food crops. Food production zonsists of bananas, breadfruit, palm oil, root crops, and vegetables grown in the context of the Mesquita pilot project (para 36). Foodstuff imports accounted for over one-third of the import of goods in 1986. 9. STP's agricultural history has been marked by the monoculture of a succession of export crops. Today, STP's established infrastructure is principally geared toward cocoa production. However, the cocoa subsector collapsed over the last 20 years mainly because of the increasingly distorted economic environment, lack of management expertise, knowledge of crop husbandry, financial resources, labor incentives, and adequate services to the agricultural sector, as well as weak governmental administrative capacity. The Government is reviewing the situation of the EEAs, which a-e presently without financial resources, and is studying the possibility of opening them to foreign participation. 10. Agricultural production is derived from state enterprises created at independence by consolidating plantations abandoned by their former owners. Although such a production structure was probably the only practical choice at the time, it is no longer appropriate because it does not allow for manaberial and financial autonomy. To attract financial resources and operate the enterprises soundly, the Government is considering the conversion of agricultural enterprises into mixed-economy enterprises and has recently promulgated an Investment Code. In the longer term, a further change in the production structure and accompanying social reforms might be needed to improve the welfare of the population and create a more balanced structure of society: because of the colonial heritage, most of the work force is employed on the plartations; there are, however, a few independent farmers. - 4 - 11. The monocultivation of cash crops has discouraged food production, and emphasis on cocoa has given STP many of the characteristics of a single-crop economy. The Government recognizes the need for diversification and, with French assistance, has prepared an Agriculture Potential Map that identifies crops which have the highest production potential in each region (Project File No. D00797). STP is also receiving assistance from the European Economic Community (EEC) for the development of cash crops, particularly palm oil; from the African Development Bank (ADB) for coffee; from FAC/AFVP (Mesquita Project) for food crops such as cereals and vegetables. It has also received assistance from USAID for maize and pepper. 12. STP's agricultural development strategy aims to: (a) accelerate the revival of the cocoa industry by reinforcing services to the cocoa subsector and rehabilitating existing plantations and providing real income incentives to workers on the cocoa plantations; (b) promote greater private sector involvement by creating conditions for foreign participation in the EEAs, and promote greater smallholder participation in agricultural production; (c) diversify the agriculture sector to avoid the risks of a single-crop economy; and (d) progressively define and carry out social reforms to improve the rural population's standard of living. The proposed project would assist the Government in implementing this strategy, especially in the cocoa subsector. Assurances were obtained at negotiations that Government would imp!-ment by March 31, 1988, three of the most important measures concerning (a) management autonomy for the EEAs; (b) flexible wage system; and (c) flexibility in recruiting and dismissing staff (para 92(a)). II. THE COCOA SUBSECTOR A. Historical Context - 13. The islands of STP were probably uninhabited when discovered by Portuguese navigators in 1471. The Portuguese later developed plantations in successive crop cycles, initially sugar cane, then coffee and finally cocoa, with slave labor from the African mainland. Cocoa was first Introduced in 1850. Production peaked in 1913 at 36,500 tons, representing 12Z of world production, but declined steadily until the pre-independence years to about 10,000 tons, as marginally productive lands were abandoned and as the Portuguese, anticipating independence, did not replant old plantations. Historical events are presented in Annex 2-1. -5- 14. The situation further deteriorated after 1975, due to the reasons mentioned in paragraph 9. The 15 present EEAs account for the bulk of STP's cocoa production, and although their production potential with rehabilitation would be about 20,000 tons/year, they produced only 4,000 tons of cocoa in 1986. Exacerbated by the increasingly overvalued exchange rate, production costs far exceeded revenues, and a significant number of cocoa workers who were unpaid and had little to purchase with whatevei wages they received withdrew from the sector. Similarly, production from private cocoa growers decreased substantially. Production constraints are summarized below and detailed in Annex 2-2. B. Production Environment 15. Ecology. STP's soil and climate are varied and provide in many areas optimal conditions for growing cocoa. However, some areas presently planted with cocoa are of doubtful agronomic value for cocoa, and the proposed project would concentrate on the most suitable areas. 16. Infrastructures. The national road network is dense though poorly maintained, distances to the port are short, and there are no problems in transporting cocoa to port facilities which are modest and need improvement. Plantation roads need rehabilitation and agroprocessing facilities need to be restored. A particularly positive aspect is that machinery has been maintained in spite of difficulties in importing spare parts. Buildings and social amenities need substantial repairs, in particular workers' housing; this has resulted in many workers leaving the plantations (para 19). 17. Production techniques. Due to a general neglect that began in the 1960s followed by a lack of management expertise and financial resources, production techniques have been inadequate for the last 20 years. Cocoa seedling nurseries have been abandoned and new tree planting and redensification programs have not been carried out; pest control has been neglected, which has led to poor quality of cocoa beans and to a reduction in the production potential of the trees; excessive pruning of cocoa trees has lowered their production potential; and excessive shade combined with intercropping has reduced yields. This situation is reflected in the low tree density and aged plantations. This declining trend could, for the most part, be reversed with a technical package including weeding, pest control and shade management. However, the general poor state of the EEAs requires in addition a selective replanting strategy for all EEAs over periods of various lengths (7 to 20 years), depending on the specific conditions of each EEA. Under the proposed project, the strategy would be to replace trees that are too old and to rehabilitate those that are in better condition. 18. Agroprocessing facilities (fermenting, drying, and grading) need repair. A study of these facilities carried out during project preparation and focusing on the two plantations to be included in the proposed project, - 6 - indicated that the existing facilities could be economically repaired and improved. However, the continued use of wood-burning cocoa dryers needs to be investigated since deforestation could disrupt the ecology in the long-term. A study on alternative means of drying cocoa would be carried out together with the forest inventory proposed in the recent energy assessment report on STP (Project File No. 229.381). 19. Human Resources. The labor force of the EEAs dropped by 24% between 1979 and 1984 (14,500 to 11,000), due to poor working conditions and a drop in real wages which led foreign workers to return to their homelands. About 40% of the work force is foreign (mainly Cape Verdeans) and more than half is female. Because of insufficient housing and the poor state of existing housing, many laborers have moved out of the EEAs. Since the transportation system is poor, absenteeism is very high (about 30-40%). Since 1980, production costs have been exceeding receipts and wages are usually paid a few months late. Furthermore, few goods are available in stores. With this lack of purchasing power and irregular food supply, laborers work only 4 to 5-hour days but are paid on an 8-hour day basis. The Government has confirmed its intention to modify the salary system for the EEA workers by introducing a fixed salary plus a bonus for productivity at each EEA (para 12 and 34). C. Main Institutions 20. Since cocoa production affects all aspects of the economy, most of the major government institutions are responsible for policies affecting the cocoa subsector. However, a lack of well defined responsibilities among them has resulted in inefficiencies, with negative effects on cocoa production. These institutieas are described in Annex 2-3 and include (a) the Ministry of Agriculture and Rural Development ("Ministerio de Agricultura e Desenvolvimento Rural" - MADR) which is also responsible for the POTO Agricultural Experimental Station, and the Mesquita pilot project; (b) the Ministry of Planning (MP); (c) the Ministry of Finance which is also responsible for the National Bank ("Banco Nacional de Sao Tome e Principe" - BNSTP); (d) the Ministry of Commerce, Industry and Tourism which is responsible for ECOMIN, a public enterprise in charge of selling key imports locally, and ECOMEX, a public enterprise in charge of exports and imports; and (e) the Ministry of Cooperation which is responsible for negotiating management contracts and foreign financing for the EEAs. 21. A particular institutional constraint has been the lack of EEAs' managerial and financial autonomy. The Government recently announced its intention to give the EEAs increased management autonomy, including a reasonable degree of financial and administrative autonomy in terms of recruiting and dismissing staff, salaries, imports of inputs and goods, and exports. -7- D. Cocoa Subsector Strategy 22. The Government's cocoa subsector strategy is an integral part of the agriculture sector strategy (para 12). Its ultimate objective is to produce cocoa at an optimal production level where cocoa planting is the most economic use for the land. In the meantime, the Government has formulaced macroeconomic policies aimed at creating a favorable economic and social environment by restoring the competItiveness of the cocoa subsector at large. 23. Sectoral policy reforms already focus on the role of the private sector and social issues, including the status of agricultural workers. With the assistance of the project, they would also focus on crop diversification, types of agro-industrial development, land use and environment, financial policies (especially concerning agricultural credit). The policy reforms aim at giving the EEAs adequate managerial and financial autonomy, at assisting in converting them gradually into mixed-economy enterprises, and at implementing the Investment Code. Services provided by the Government to the cocoa industry would initially include training and technical assistance, and in the medium-term financial services and agricultural credit. In carrying out the above strategy, the Government vould initially focus on economic recovery by increasing cocoa production to generate foreign exchange earnings. E. Rationale for Bank Involvement 24. Cocoa is of overwhelming importance to STP's economy. Any substantial improvement of economic conditions in the country is linked to the rehabilitation of the cocoa subsector. In addition, the proposed project would be the first major step in implementing the Government's strategy to give its agricultural enterprises true autonomy in their decision-making process and in their access to, and use of, resources. The Bank Group, including IFC, has a comparative advantage in attracting external financing and private firms to assist the Government in this undertaking. Furthermore, the project would be implemented in parallel with a Structural Adjustment Credit, which will provide the macro framework within which supply responses can be expected to take place and will ensure the viability of the country's external accounts over the 1987-89 period. III. THE PROJECT A. Project Objectives and Scope 25. The project aims at suppozting the Government's efforts to achieve economic recovery by increasing cocoa production and to reach its longer term objectives for the development of the agriculture sector as a whole. The project would: 1. contribute to increasing production and improving social conditions for workers in two cocoa plantations; and 2. reinforce STP's agriculture sector with emphasis on (i) the cocoa subsector by facilitating future financing of other plantations presently not receiving external assistance, and providing technical support and training; (ii) the food crop subsector by creating an applied research capacity; (iii) supporting smallholders development; and (iv) addressing other issues through technical assistance for the preparation and implementation of studies and strategies, including that of land distribution. B. Summary Description 26. The project would constitute a five-year time slice of a long-term rehabilitation program, and would include the following components: 1. Plantation development in two EEAs (Bela Vista and Uba Budo - Map 19574) including, for each EEA: (a) rehabilitation and expansion of cocoa production; and (b) increase in labor productivity. 2. Support to the agriculture sector with emphasis on the cocoa and food crop subsectors by: (a) strengthening cocoa applied research and technical support activities; (b) reintroducing agricultural training activities; (c) introducing food crop applied research and development activities; (d) assisting other EEAs not already benefiting from external assistance in developing plans to rehabilitate their enterprises or restructure their activities if necessary, in order to attract financing to carry out such plans; (e) assisting smallholders in increasing production through the importation of inputs and small tools. as well as technical support and training; and -9- (f) undertaking studies and using consultants to assist the Government in formulating policies and creating an economic and social environment favorable to the development of its agriculture sector, particularly the promotion of food crop development and diversification. The Government would ensure the pursuit of project objectives beyond the five-year period, according to a plan which would be submitted to IDA for review by June 30, 1991. Assurances to this effect were obtained at negotiations (para 92(b)). C. Detailed Features 1. Plantation Development 27. Two EEAs, Bela Vista and U a Budo, would be modernized under the proposed project. Their current low production and yield are principally due to (a) insufficient management capacity and resources to apply modern production techniques, and (b) low labor productivity. To correct this situation two foreign firms with expertise in plantation management have been selected by the Government to manage one EEA each and initiate a program of rehabilitation and replanting. Emphasis would be placed on increasing labor productivity by improving workers' conditions, regularizing their salary situation and providing them with incentives (including the introduction of a bonus system), developing food crop production, and improving social infrastructure. (a) Rehabilitation, Management and Expansion of Cocoa Production 28. Given the wide difference in the conditions of the two ERAs, (Annexes 3-1 and 3-2), Bela Vista would emphasize rehabilitation and Uba Budo, replanting. The two foreign firms selected by the Government to fully manage one EEA each would have the authority to market directly the cocoa produced in their respective EEA. The management contracts signed on May 13, 1987 are described in Annex 3-3. A condition of effectiveness of the IDA credit is that (a) the conditions of effectiveness of at least one of the management contracts between either of the foreign firms and the EEA under its management would be fulfilled (except for its cross-effectiveness condition with the IDA credit and the down payment for start-up activities) (para 93(a)); and (b) the said EEA would have (i) settled its outstanding debts with BNSTP; and (ii) established an acceptable accounting system. A condition of disbursement of IDA funds for the other EEA is that the other foreign firm and EEA would have complied with the above arrangements (para 94). 29. The foreign firms have initiated activities in STP under separate short-term contracts. They have made a physical assessment of the delineation of each EEA, soil conditions, existing assets including trees, equipment, machinery, and stock, as well as an assessment of personnel needs. Each has presented a report from which project costs have been - 10 - established. They have also prepared nurseries and initiated planting activities. The firms are also establishing an accounting system to fit efficient management needs. These activities have been financed by the Project Preparation Facility and supplemented by an allocation from the Line of Credit for Economic Rehabilitation and Modernization (Cr. 1590-STP). Under the project, the foreign firms would, within the limits of approved annual work plans and budgets (para 66), initiate a full investment program to modernize the plantations. They would principally rehabilitate and replant cocoa trees, construct or repair existing infrastructure, and supervise the construction of new ones (irrigation canals, plantation access roads, processing facilities, houses and central buildings). They would ensure technology transfer by setting up administrative, financial and management systems, and by training counterparts to the experts (initially a minimum of five). They would also carry out several short-term missions from headquarters for specific activities and general supervision. The management contracts, agricultural inputs and machinery, civil works, and equipment for the two EEAs vould be financed under the project. All labor costs and an increasing percentage of other costs would be covered by revenues from cocoa sales (paras 77 and 80). 30. Out of Bela Vista's total cultivated area of about 3,200 ha, 2,100 ha are planted with cocoa, and the rest consists of about 950 ha of other cash crops (palm oil, coconuts) and 150 ha of food crops. Although Bela Vista is one of the better EEAs due to the long experience of its general manager in cocoa plantations, production has fallen from 1,100 tons/year in 1980 to an estimated 550 tons in 1986. In addition to poor production techniques (paras 17-18), the more recent decline of production is due to disrepair of the existing irrigation network on 1,500 ha (details in Annex 3-1). Given the better condition of the trees in Bela Vista compared to those at Uba Budo, the foreign firm would emphasize rehabilitation. 31. Under the project, about 1,700 ha of cocoa would be rehabilitated and the remaining area, which is unsuitable for cocoa production, would be allocated to food crops or eventually reforested as appropriate; the areas cultivated with other cash crops would be maintained. These activities would be managed by the foreign firm selected by the Government ("Francisco Mantero - Agricultura e Com6rcio Internacional, S.A." - FM), a Portuguese firm with a long experience in plantation management in Sao Tome. To satisfy the management contract requirement of effecting liaison with a reputable scientific institute specializing in cocoa, FM is associating itself with the "Comissao Executiva do Plano da Lavoura Cacaueira" (CEPLAC) of Brazil. Under the rehabilitation program, about 200 ha would be replanted and the rest rehabilitated. These areas could be reduced or expanded later, subject to a technical review of the detailed plantation development plans during project implementation. Annex 3-4 provides a breakdown of the planting schedule, expected yields, cost per hectare, and the expected production in tons. - 11 - 32. Uba Budo's total cultivated area of about 3,400 ha covers 2,300 ha planted with cocoa, the rest consists of cash crops, food crops, forests, and marginal areas. Production has steadily declined from 400 tons in 1982 to 285 tons in 1984 and 165 tons in 1985. Figures for 1986 are estimated to be over 300 tons because of favorable weather conditions. (More details are given in Annex 3-2). The mat: causes of Uba Budo's situation are lack of management and a r*p4dly depleting labor force. The foreign firm selected by the Government to manage Uba Budo, SOCFINCO-FRANCE, S.A., a Franco-Belgian firm with worldwide experience in plantation management, would effect liaison with three French entities to draw on their experience and competence in agriculture, cocoa technology, and cocoa marketing. 33. Under the project, about 1,800 ha of cocoa would be rehabilitated. Given the particularly deteriorated state of the trees in Uba Budo, an intensive replanting schedule for 1,50C ha and a rehabilitation schedule for 300 ha have been envisaged (Annex 3-4). As for Bela Vista, the planting schedule might be revised after further technical review during implementation. Although rainfall is more favorable here than in Bela Vista, about 200 ha of marginal cocoa producing areas would be irrigated, as well as an area for food crop would be developed by workers. (b) Increasing Labor Productivity 34. Workers' Situation. The management contracts give the two foreign firms adequate power to manage their staff efficiently (Annex 3-3), Including the power to distribute incentives, and to recruit and discharge staff in conformity with existing STP labor legislation and labor rules that the foreign firms might want to establish. Assurances were obtained at negotiations that Government would take all the necessary steps to ensure that the payment of salaries to Bela Vista and Uba Budo workers are made on time (para 92(c)). The foreign firms would re-establish EEA general stores for the sale of basic consumer goods to workers. Should these goods not be available locally, the management firms, after consultation with Government, would import them directly using foreign exchange from cocoa sales. Other critical fac... s necessary to improve labor productivity are food crop development and improved social infrastructure, which are discussed below. 35. Food Crop Plots. To supplement workers' monetary compensation in Bela Vista and Uba Budo, the successful activities of the FAC-financed Mesquita Project on food crop extension (Annex 2-3) would be extended to these two EEAs. At present workers are randomly cultivating food crops without official authorization, Under the project, the workers' rights to cultivate food plots would be officially recognized and an area of 250 ha for 1,000 workers in the two EEAs would be demarcated for this purpose. If necessary, these areas would be expanded during project implementation as the labor force builds up. Each direct family unit (of which at least one member must work either at Bela Vista or Uba Budo) would be assigned a plot to be cultivated by family members not working on these EEAs and by EEA workers outside their regular working hours. Since this activity would not - 12 - meet all their ,ood requirements, the workers would continue to receive food under a three-year World Food Programme (WFP) in lieu of a third of their salary. For an interim period (three to four years) the prices would be subsidized to cushion the shock of devaluation. The Dobra counterpart funds of the food 4d to the workers would be deposited by the EEA into the Government's account in BNSTP for social works under the WFP project. (Details are in Project File No. 228.975.) It is expected that these two elements, combined with some cash purchases, would satisfy the nutritional requirements of the EEA workers and their families. 36. This component would be managed by the Mesquita Project rather than by the foreign firms whose task would be to concentrate on industrial crop activities. A volunteer specialist in food crops and support staff would be assigned to each EEA to advise workers. The volunteer would work under the direction of the Mesquita Project but in close cooperation with the foreign firm. Workers would be initially supplied with tools and inputs free of charge, which would be procured through the Mesquita Project. Thereafter, they would purchase replacement tools and additional inputs at cost plus 15%. Sales revenues would be deposited into the revolving fund established by the Mesquita Project to assist other farmers to start food plots. These arrangements have proven satisfactory under the Mesquita Project. Under the project, FAC/AFVP would finance two AFVP volunteers and two vehicles equipped with demonstration equipment, and IFAD would finance workers' tools, inputs, and furnishings for the volunteers' houses. Each EEA would provide the necessary housing for its volunteer and the Government would provide the necessary local support staff through the Mesquita Project. 37. Improved Social Infrastructure. The project would improve workers' living conditions and social environment through the repair of existing buildings and social amenities and the construction of additional housing. Because a substantial part of existing housing and collective facilities is of low standard and in severe disrepair, many workers have moved to town and absenteeism is high. The problem is aggravated by the occupancy of the facilities by many retirees and relatives of workers who do not work on the two EEAs. Assurances were obtained at negotiations that by December 31, 1987, the Government would, after consultation with IDA, regularize the housing situation by establishing rules to determine who would be housed on the two plantations and by relocating others according to a plan acceptable to IDA (para 92(d)). This component would include the improvement of existing day-care facilities and schools to assist female workers who provide most of the field labor. Specifically, the project would: (a) ensure the transportation of those workers who live in nearby towns; (b) rehabilitate and improve housing in the two EEAs, including water supply, sanitary facilities and electricity; (c) build, renovate and enlarge social 4nfrastructure where necessary, particularly the existing day-care centers and schools; (d) initiate a program of self-help construction of houses within the framework of the Government's new orientation toward promoting this activi:y. Under the self-help - 13 - construction program, workers who do not live in repairable houses on the two EEAs would be given time, and provided with the necessary materials, to build their own houses. 38. A consultant would be recruited to assess the situation, including the need for new housing, most appropriate design and legal implications of the self-help construction program. The local costs for civil works would be financed by the Government from funds available under the WFP project, complemented if necessary by budgetary funds. OPEC would finance the foreign exchange costs, i.e., the consultant fees and imported materials for civil works. The foreign firms would be responsible for the preparation of plans based on the consultant's recommendations, and for the execution of the construction program. The Project Support Unit (PSU) (para 63) would coordinate with MADR, which is responsible for the WFP project, and would ensure that funds for local costs would be available in due time. 2. Support to the Agriculture Sector with Emphasis on the Cocoa and Food Crop Subsectors 39. In line with the Government's strategy to strengthen the agriculture sector (para 12) and diversify its agricultural base, the project would strengthen STP's agricultural support services in the areas of cocoa technical support, agricultural training and food crop development. The project would also facilitate the Government's efforts in seeking external financing for the other EEAs. Furthermore, it would promote the establishment of additional services, such as the development of an agricultural credit system, and initiate an agricultural diversification program. Because of disarray in the institutions in charge of applied research (POTO Station) and training (CATAP), institutional changes would be brought about in two phases: a first phase with immediate effect during which small independent units would be established, using existing staff and facilities; this first phase is described in the following paragraphs. In a second phase, institutional reforms to establish sustainable applied research, training and agricultural services would be carried out. Preparations for these reforms would be made by the Government during project implementation with the assistance of consultants and in consultation with IDA. A specific plan to implement these reforms would be discussed during the project's Interim Review (para 68). (a) Cocoa Applied Research and Technical Support 40. At present the agriculture sector receives minimum technical support from the Agricultural Experimental Station at POTO, which functions as a department of the Ministry of Agriculture and Rural Development. Most of its staff (about 70%Z have no defined functions, are underqualified, and have low morale due to poor working conditions. A feasibility study, financed under the PPF, concluded that a full reorganization and rehabilitation of the POTO Station would entail major investments in time and capital costs which would not be justified in relation to the present level of production and the urgent need for - 14 - Improving technical support to the cocoa subsector (Project File No. 228.965). The Government agreed, therefore, that in the initial stage a small Cocoa Applied Research and Development Unit would be established at the POTO Station to monitor and provide technical support to the EEAs. The unit would associate scientifically with the Station to benefit from its work, but would be administratively and financially independent. There would be a scientific committee, consisting of members from IRCC, the participating EEAs and the MADR, to review the results of applied research and to decide on a course of action. 41. An initial work plan has been developed whereby in the first phase the main areas for development would be (i) optimization of fertilizer use, (ii) trials and optimization of defense systems (particularly against black pod), and (iii) monitoring of new planting methods such as the no-shade technology. In a second phase, other programs such as the production of hybrid seeds and the use of vegetable materials, introduced to STP as well as those present in the POTO Station, could be developed. As an on-going activity, the unit would also provide technical support, in particular to those EE&s being rehabilitated under external financing. This support would include the training of personnel during field visits by specialists, as well as specific seminars to be organized with them by the training unit. One cocoa specialist from IRCC would be stationed at POTO to head the unit for 3 years. He would be assisted by a French National Service Volunteer and periodic missions from consultants for specific areas. Six staff members would be chosen among existing personnel at POTO for the posts of team chief (1), agricultural workers (4), and secretary (1). Further details on this component within the POTO Station are in Project File No. D00801. Under the FPF, IDA has financed the feasibility study for this componeut and the planting of a nursery (para 62). The French CCCE would finance technical assistance, equipment, inputs and training and FAC would fin4nce the volunteer. (b) Agricultural Trainin 42. The project would also help to develop a three-phase national training capacity in agriculture. First, the foreign firms would trair national personnel of Bela Vista and Uba Budo EEAs in plantation management and the application of technologies, and send key staff abroad for specialized training so they could gradually replace expatriate staff. Second, the technical assistance teams of the applied cocoa and food crop research components would train counterpart personnel locRlly or abroad to ensure their ability to replace expatriate staff at tha end of the project. Furthermore, the teams would provide in-plantation training, as appropriate, during their field visits. Third, a small training unit would be established at Bela Vista to train initially foremen and administrative personnel, principally those in ERAs which have the potential of being rehabilitated either under external financing or through privatization. At a later stage, private smallholders could also be trained. Training would primarily focus on cocoa production, including administrative skills - 15 - related to supervising workers and to handling physical and financial resources, as well as on more technical courses In production methods, and maintenance and repair of machinery. 43. During the preparatory phase, the reestablishment of the C&TAP training center (closed since January 1985) was studied by USAID and the Institute for Economic Cooperation (ICE) of Portugal, but was abandoned because of lack of trained national staff, funds for the rehabilitation of the center, and absorptive capacity for structured training in the agriculture sector. The unit would be headed by a resident training advisor, assisted by a national counterpart already nominated by NADR, and a secretary. Consultants would be recruited for-training in specific topics. Most of the training would be on site and only an office and small training room would be rehabilitated at Bela Vista. There would be a Training Committee consisting of the resident training advisor, his national ceunterpart, representatives from the participating EEAs and the Ministry of Agriculture. The Committee would meet periodically to (i) analyze general training needs in the agriculture sec:or; (ii) review course selection; (iii) assist in participant selection; (iv) monitor course implementation; and (v) assist in the post-training phase. A full description of this component is in Project File No. D00801 and details were worked out with MADR and participating EEAs during the USAID/ICE mission in February 1987. The timing of this component is not critical to the project. The training unit will be financed through a trilateral agreement with USAIDIICE and the Government of STP. Under the agreement, USAID and ICE will finance one technician in Tropical Crops/Agricultural Education for three years and thirty months of short-term specialists, fellowships, vehicles, furnishings and training materials. (c) Food Crop Applied Research and Development 44. Although the cocoa subsector is the most important source of revenue for STP, it is in STP's long-term interest to reduce its dependence on monoculture and, therefore, take the necessary measures to assure a steady increase of domestic food production. STP is heavily dependent on food aid for its domestic consumption. In addition, one-third of export revenues in 1986 was spent on food imports. In the last six years, STP has been receiving technical and capital assistance for the production of, and extension services for, food crops (FAC/AFVP, UN Emergency Fund and USAID). However, there is no applied research and development program for food crop development. The project would create a Food Crop Development Unit at the Mesquita Site (Annex 2-3, para (g)) which would be responsible for introducing, selecting and testing seeds in order to identify the varieties that would be most adaptable to the conditions of the country, as well as for adapting the cultural techniques that must accompany them. It would work together with the Mesquita Project and build on its practical experience. - 16 - 45. An expert in the selection and production of seeds would be recruitad for 3 years to head the Unit. He would be assisted by a national counterpairt and three agricultural workers. Consultants would be recruited for specialized training for the existing and newly recruited extension staff and field technicians. A study would be carried out after the first year to assess the feasibility of developing a center for seed production and ..mproved vegetable material. IFAD would finance the technical assistance, construction of an office, laboratory, a small warehouse, housing for the expert, and inputs and equipment to carry out the experiments. The Government would supply a national counterpart and three workers. The implementation of this component would be based on annual work programs to be approved by IDA/IFAD. The first year's work program was discussed in detail with the Government at negotiations. (d) Support to Other EEAs 46. Since the Government intends to rehabilitate the other EEAs, the project would assist in determining their needs and seeking financing by (i) making a quick assessment of their key constraints and immediate management and technical needs; (ii) when appropriate, preparing a pre-feasibility level rehabilitation plan including an estimate of the financing needed to carry it out; and (iii) preparing a detailed action program to finalize any required studies and carry out the plan. This assistance would be provided by the PSU assisted by short-term consultant missions. In a first scage, a consultant would define the methodology to carry out these assessments and train PSU staff, and subsequently make regular visits to provide further guidance. Upon recommendation from the Minister of Agriculture and Rural Development, the Government would attempt to arrange financing when appropriate. 47. Some agricultural inputs would be made available through the project to support urgently identified needs. Technical support would be provided by the cocoa applied research and development unit at POTO (para 40). It is also expected that the management techniques of the foreign firms in Bela Vista and Uba Budo would have a demonstration effect on the other EEAs, and that the foreign firms' know-how would be made available to them if so requested. (e) Assistance to Smallholders 48. As a result of 400 years of colonial rule, smallholdings are not a tradition in STP (para 10). About 3,500 independent farmers cultivate about 2,600 ha, of which half is planted with cocoa. To support government policy to stimulate agricultural production by the private sector (para 12), technical guidance would be made available under the cocoa technical support (para 42) and food crop development (para 44) compone.nts. The project would also facilitate access to inputs, small tools anrd achinery by smallholders. Initially, these items would continue to be imported by Mesquita and sold on a cash or a credit basis to the farmers for food crop development. Cocoa producing smallholders will have access to the foreign exchange generated by their exports for imports of inputs, equipment and - 17 - machinery. They woald be free to request the agricultural enterprises, ECOMEX or any other private importer, to import the necessary inputs on their behalf. In the meantime, a consultant would be recruited to confirm the feasibility of establishing a credit secheme and establish criteria for eligibility and conditions of lending to far1ezes and a system to process and monitor these loans. 49. Assurances were obtained at negotiations that these imports would be made accessible to smallholders initially through the Mesquita Project, and that after the first year of implementation, but not later than December 31, 1988, a review would be made by the Government in consultation with IDA and IFAD to determine the most appropriate system for future import and sale of the inputs, tools and machinery (para 92(e)). IFAD would finance technical assistance, training, inputs, tools and machinery. (f) Studies and Consulting Services on the A8riculture Sector 50. The proposed project would include studies and consulting services to assist the Government in formulating and implementing policies in the agriculture sector (paras 12, 22 and 23). These studies and consulting services would fall into three main groups. First, consulting services would assist Government to rationalize its on-going land distribution programs by (i) identifying appropriate land and crops for diversification and private smallholder development using the FAC-financed Agricultural Potential Map; (ii) improving land tenure through the development of a mechanism and corresponding procedures for granting land titles to individuals and of a legal framework for issuing land titles. Second, a study would be made to develop a strategy to attract foreign investors in response to the Investment Code. 51. Third, studies and consulting services would be carried out to answer more specific questions on (i) cocoa marketing; (ii) the status of STP's ecology and ecological effects of the proposed rehabilitation program and diversification of crops on STP's unique flora and fauna; (iii) fuelwood needs for cocoa dryers and their effect on deforestation, together with a forest inventory as proposed in the energy assessment report (para 18); (iv) role, organization, manpower planning and training needr of MADR; and (v) ways to prepare future projects and respond to particular situations which might arise during project implementation. MADR's Planning Department would be responsible, in liaison with the PSU, for preparing terms of reference end for supervising the execution of most of these activities, and the PSU would be responsible for their monitoring and coordination. Terms of reference for the principal studies and consulting services were agreed upon during negotiations (Annex 3-5). The PSU would be responsible for ensuring the preparation of the remaining terms of reference which would be subject to approval by the Minister of Agriculture and Rural Development. The recommendations of the studies and action plans for the implementation of strategies would be submitted to IDA not later than September 30, 1988. Assurances to this effect were obtained at negotiations (para 92(f)). About 10 man-months of consultancies and US$450,000 for studies would be financed under the project. - 18 - D. Et21st Costs and Financing 1. Project Costs 52. Total project costs, over a five-year period, are estimated at US$21.8 million equivalent, with a foreign exchange component of 87X (Annex 3-6). This amount only includes incremental costs and itplicit taxes on locally procured items which are marginal, but excludes taxes and import duties on direct imports since the Government has indicated that they would be waived. Cost estimates are based on December 1986 price estimates and include physical contingencies of 10% on all costs except nanagement fees (which are fixed under the terms of the contracts between the foreign firms and Government), local labor (at 0) and technical assistance (which carries 5Z). Price contingencies have been calculated on foreign costs according to Bank procedures, which have been estimated at 3.01 for 1987, 1.01 for 1988-1990, and 3.5Z for 1991. There is no accurate measure of inflation rate in STP but it is assumed that periodic devaluations will take place under the new exchange rate system to be established under the Structural Adjustment Credit which will offset for the differential between domestic and international inflation. Nevertheless, some lag in adjustment is assumed and price contingencies for domestic costs have been estimated at 8.1Z for 1987, 6.3% for 1988-1990, and 8.51 for 1991. Total contingencies are equivalent to 142 of base cost estimates, or 121 of total costs. 2. Finanv1 53. External financing would amount to US$19.7 million, which represents 901 of project costs. IDA's contribution would amount to SDR 6.1 million (US$7.9 million equivalent) including refinancing of advances under the PPF totaling US$1.5 million. IDA financing would cover mainly the management contracts and part of the agricultural investment costs of the Bela Vista and Uba Budo plantations, and studies and consultancy services for the agriculture sector and cocoa subsector. BADEA has approved a contribution of US$6.0 million for the agricultural investment costs of most Uba Budo plantation and some Bela Vista plantation. CCCE has confirmed its intention to finance cocoa technical support activities for an estimated US$1.0 million. OPEC has expressed its intention to finance US$1.1 million for the agricultural investment costs of Bela Vista. IFAD plans to finance US$1.9 million for components related to food crop development, private smallholders, and studies on diversification. USAID has approved a contribution of US$0.9 million, for training activities through its trilateral agreement with Portugal and STP. WFP would contribute US$0.6 million equivalent in food for the social infrastructure component. FAC/AFVP would contribute US$0.3 million for food crop development activities in the two plantations and for cocoa applied research. The Government's contribution of about US$2.1 million would cover incremental staff, and operational and maintenance costs, mostly paid from the cocoa revenues of the two EEAs. The cofinancing situation is summarized below. - 19 - FINANCING PLAN (US million): Food USA!! Support to FAC and Laborers and Total IDA BR IFAD COCE OPEC Portumal WFP AFVP OVT. Coets 1. Plnation2!V10Mt etea Vista (a) Productio 2.3 1.4 - - 1.1 - - 0.8 5.6 (b) Food crops - 0.05 - - - 0.1 (c) Social Infrastructure - 0.4 - - - - 0.3 - 0.3 1.0 Uba 8udo (a) Production 3.8 3.6 - - 0.4 7.7 (b) Food crops - - O.OS - - - 0.1 - 0.1 (c) Social Infrastructure - 0.4 - - - - 0.3 - 0.3 1.0 2. !Sr to the Z. Sector ta Ccoa leania *w 0.3 - 1.0 - - 0.1 0.1 1.5 (b) Agr. Tralning 0.2 - . - , 0.9 , _ 1.1 (c) Food Crop Dev. 0.8 - - 0.9 (d) Sup. to Other As 0.5 0.2 - - - - - - - 0.8 (e) Smallbolders 0.7 0.7 (f) Agr. Studies & PSU 0.8 _ 0.3 _2 1.3 Total Financing la2 Ai La L. WL. 2n 54. USAID, Portugal, FAC, APVP, and WmP contributions would be in the form of grants to the Government. IDA, BADRA, CCCE, OPEC, and IFAD contributions would be in the form of credits on standard terms. Delays in implementing the components cofinanced in parallel would have little effect on project implementation and would not substantially reduce benefits. The fulfillment of conditions precedent to the effectiveness of the BADEA and OPEC loans is a condition of effectiveness of the management contracts (Annex 3-3). Cross-effectiveness clauses linked to the management contracts are given in paragraph 28. Under these circumstances, direct cross-effectiveness conditions of the IDA credit with the BADEA and OPEC loans are not necessary. On the basis of the cofinancing arrangements, the present IDA credit of SDR 6.1 million (US$7.9 million) would finance about 362 of total project costs. 55. Funds would be passed on from the Government to the EEAs as equity. Because of the precarious financial situation of the EEAs (para 57), it would be premature to burden them with debt. Receiving funds as equity would enable the EEAs to build up a sound financial base that would permit them in the medium-term to borrow, and possibly, if circumstances warrant, to diversify their equity base. Funds to other project public institutions would be passed on as grants. Since funds advanced under the first two PPFs were Insufficient to cover start-up expenses, a supplement equivalent to US$500,000 was allocated from the agricultural component of the Line of Credit for Economic Rehabilitation and Modernization (Cr. 1590-STP). Funds were exhausted again by February 1987 and additional financing was made available through a third PPF. - 20 - E. Accounts and Audits 56. Each separate entity under the project would maintain accounts to provide adequate and timely information about its operations. The project beneficiaries would include: (a) the two EEAs, Bela Vista and Uba Budo, which are revenue-earning entities; and (b) other entities which would not earn substantial revenues, including the Project Support Unit, the research, training and food crop development units, the project-related component of the Mesquita Project, and the project-related component of the WFP project. Project-related activities would be identifiable separately. Financing for the annual audits has been included in the project support component. the accounts, together with statements of expenditures where relevant (para 61), would be audited annually by internationally recruited independent auditors acceptable to IDA. Annual accounts would be submitted to IDA within four months, and audited accounts within six months, of the end of each fiscal year. Assurances on these accounting and auditing arrangements were obtained at negotiations (para 92(g)). 57. A Statement of Financial Affairs prepared in 1985 revealed that none of the ERAs, including Bela Vista and Uba Budo, is financially sound, that reliable accounting practices have not been followed and that accurate financial figures for the EEAs are not available. (Details are in Project File No. 228.960.) Prior to disbursing IDA funds to any of the ERAs, acceptable accounting systems would be prepared (para 28). It was agreed during negotiations that if a satisfactory valuation of the assets of Bela Vista and Uba Budo is not available at the time of the first audit, Government would be responsible for employing consultants to furnish promptly an acceptable valuation of assets' report to IDA. 58. The Government would open three foreign exchange accounts (special accounts) at BNSTP: one upon IDA credit effectiveness and Government request, i.e., a special account (revolving fund) to be managed by PSU (para 63), in which IDA would deposit initially US$50,000 representing the equivalent of about three months of cash expenditures in the project components other than the Bela Vista and Uba Budo ERAs. Each of the two other accounts would be opened upon compliance with IDA conditions of credit effectiveness and disbursement (para 28): one in the name of Bela Vista and the other in the name of Uba Budo, in which IDA would deposit US$100,000 as initial working capital, i.e., the equivalent of about three months of expenditures, except items that would be paid directly to suppliers. Other accounts would be opened for each cofinancier. The Government's contribution (out of revenues from Bela Vista and Uba Budo) would be deposited in two fore3gn currency accounts and two local currency accounts according to agreements reached with the two foreign firms (Annex 3-3). - 21 - F. Procurement and Disbursements 1. Procurement 59. Procurement arrangements are summarized below, with figures in parentheses showing the respective amounts to be financed by IDA. AMOUNTS AND METHODS OF PROCUREMENT (US$ million) Total Procurement Element ICB LCB Other Costs Management Contracts a/ - - 4.6 4.6 - - (4.6) (4.6) Civil Works and Construction Materials d/ - 1.5 h/ 1.8 b+c/ 3.3 - (O.1) (0.1) (0.2) Equipment and Vehicles - - 1.3 b+c/ 1.3 _ - (0.1 (0.1) Technical Assistance, Training and Studies e/ ^ 3 4 b+c/ 3.4 - - ~~~~~~~(0.6)- (0.6) Agricultural Inputs d/ 3.3 b+c/ 3.3 (0.7)- (0.7) Agricultural Machinery d/ 2.2 b/ 2.2 - ~~~~~ ~ ~~~~~~~~(0.2)_ (0.2) Operating Costs and Maintenance - 2 1 b+f/ 2.1 Personnel - - 0.1ff 0.1 Reimbursement of PPP 1.5 +cJ 1.5 - - ~~~~~~~(1.5) 1) Total -1.5 X . a/ Government invited firms from several countries to submit proposals and signed contracts with two foreign firms. b/ Includes cofinancing subject to cofinanciers' procedures. _/ Contracts of less than US$100,000 would be made through International shopping or under force account as appropriate. d/ Bidding documents for contracts estimated at more than US$100,000 equivalent would be subject to prior review by IDA. el Technical assistance, training and studies would be procured following Bank guidelines. T/ Paid by the Government. i/ Start-up activities by the two foreign firms. Procurement will be subject to Government regulations governing local competitive bidding, which would be reviewed and amended as necessary to ensure acceptability by IDA. - 22 - 2. Disbursements 60. Disbursements of the IDA credit of SDR 6.1 million (US$7.9 million equivalent) is shown over an 7-1/2-year period starting July 1, 1987 (Annex 3-7), according to Bank guidelines. Project disbursements follow the standard profile, but start at a higher level because of a US$1.5 million reimbursement of the PPF in the first year. The project disbursement period has been reduced to 7-1/2 years from the standard period of 8-1/2 years because the foreign firms managing the two plantations Bela Vista and Uba Budo (which account for 662 of total project costs and 84% of IDA financing) have been in place and started replanting activities since March 1986 under PPF financlng. Retroactive financing of up to SDR 250,000 would be available for expenditures relating to the two management contracts between June I, 1987 and the date of signing the credit agreement. The closing date of the Credit would be December 31, 1994. The proceeds of the IDA credit would be disbursed as follows. DISBURSEMENT OF IDA CREDIT (US$ million) % of Expenditurrs Category Amount To be FbancJd./ fore Loca 1. Plantation Devel2ont (Bela Vista) (a) management Services 1.3 10E - (b) Techn. Assistance, Training, Studies 0.1 100 100 (c) Civil Works 0.1 100 90 (4) Equipment, Machinery and Vehicles 0.3 100 90 Ce) Agricultural Inputs 0.1 100 90 Sub-total Plantation Bela Vista 1.9 2. Plantation Development (Uba Budo) (a) Management Services 2.3 100 (b) Tech. Assistance, Training, Studies 0.1 100 100 ^c) Civil Works 0.2 100 90 (d) Equipment, Machinery and Vehicles 0.1 100 90 (e) Agricultur-l Inputs 0.2 100 90 Sub-total Plantation Uba Budo 2.9 3. Su rt to Aricultural Sector: Technical Assistance, Traintig, Studes, Audit (a) Other EeAs and Smallholders 0.1 100 100 (b) PSU, Studies, and Consultants 0.4 100 100 Sub-total Supp. to Agric. Sector 0.5 4. Equipment and Supplies for the PSU 0.1 100 100 5. Reimbursement PPF 1.5 6. Unallocated 1.0 Total Disbursements LS at These percentages represent the percentage of the eligible costs that IDA would disburse. - 23 - 61. Disbursements against management fees, inputs, machinery, vehicles, equipment and consultancies would be made upon applications by the project coordinator (para 63) and fully documented; disbursements for local purchases below US$20,000 equivalent and work on force account would be against statements of expenditures. For Bela Vista and Uba Budo EEAs certification of local purchases and work done on force account would be made by their general managers. Other purchases would be certified by the project coordinator. Full documentation would be retained by the Project Support Unit and the Bela Vista and Uba Budo EEAs for review by auditors and IDA supervision missions. G. Implementation and Or&anization 1. Preparatory Activities 62. In December 1984, February 1986 and March 1987, IDA approved three PPF advances totaling US$1.5 million to carry out project preparation activities and finance a program of start-up activities. They included housing for foreign experts expected to arrive at the beginning of the project, preparation of implementation studies and start-up activities by the two foreign firms for Bela Vista and Uba Budo (para 65), short-term consultancies to carry out a feasibility study, soil analysis and the planting of imported high-yielding cocoa hybrids in a pilot-scale nursery (para 41), and other short-term consultancies for detailed project preparation and start-up activities. The two foreign firms had each prepared nurseries while awaiting project approval to ensure early project start-up and quick realization of benefits. When project processing was suspended in June 1986 because of the rapid deterioration of the economy, an extension of their contracts was financed by the remaining PPF and US$500,000 from the Line of Credit to plant the seedlings. Since IDA decided to process the Structural Adjustment Credit and the Cocoa Rehabilitation Project simultaneously, a third PPF was approved to maintain the presence of the two foreign firms until full funding would be made available upon effectiveness. Visible progress in the rehabilitation of the two EEAs has facilitated dialogue with the Government on macroeconomic issues, since it appreciated IDA's active interest in the country's development, and the urgency of taking measures to revitalize the cocoa subsector. 2. Project Management and Coordination 63. A Project Support Unit would be established under the project to strengthen the Government's capacity to plan and monitor activities in the agriculture sector, initially emphasizing the cocoa subsector. PSU would be situated in MADR (Annex 2-3) and headed by an internationally recruited project coordinator, who would also be the project coordinator for the Line of Credit; it would include a national deputy project coordinator and at least one support staff who will execute the functions of accountant and secretary. PSU, through the project coordinator, would be fully accountable to the Minister of Agriculture and Rural Development, who would - 24 - provide general directions and government position on policy issues concerning the project. and would assign responsibilities to carry out specific actions. The obganlzation, staffing and functions of the PSU and the terms of reference of the Project Coordinator and his deputy were agreed upon at negotiations (paras 92(h) and 92(i) and Annex 3-8). The establishment of the PSU and employment of a project coordinator and deputy coordinator are conditions of effectiveness (para 93(b)). The project coordinator would be financed for the first two years from the Line of Credit. It would be determined at the interim review (para 68) as to whether the national deputy coordinator would assume the position of project coordinator or further financing would be required for the continuation of the internationally-recruited project coordinator for the full project duration. 64. The PSU would: (a) ensure exchange of information between the various entities and individuals concerned with the project; (b) act as a central point in project administration; and (c) monitor and evaluate the progress of the project. In particular, the project coordinator would be responsible for collating progress reports concerning the project and for preparing consolidated reports to be submitted to the Minister of Agriculture and Rural Development, IDA and other concerned agencies, in addition to other reports which would be issued directly by specific project entities. Decision-making powers concerning internal policy issues and approval of annual work plans and budgets of Bela Vista and Uba Budo EEAs, and concerning research, food crop development, and training units would be vested in the respective Boards or Committees. Day-to-day management decisions would be the sole responsibility of the general managers or directors of the above entities, on the basis of annual work plans and budgets approved by their Supervisory Committee. 3. Management of Bela Vista and Uba Budo EEAs 65. Recognizing that one of the underlying causes for the EEAs' poor performance was the lack of management capability, the Government invited in June 1985 reputable firms from several countries to submit proposals to manage the Bela Vista and Uba Budo EEAs. The Government awarded the contracts to two foreign firms to manage one plantation each. Although it would have been financially less costly if one firm had managed both EEAs, these two plantations would be the first of a series to be managed by foreign firms, and the Government wanted to maintain competition and a level of comparison between the two firms. This agreement was made with the understanding that should additional financing be available during the next three to five years, each firm could take charge of an additional EEA. The contracts were negotiated in December 1985 and IDA's comments were discussed and finalized with the Government prior to IDA credit negotiations. The management contracts were signed on May 13, 1987. Preparatory activities by the foreign firms are underway and financed under the PPF and supplementary financing from the Line of Credit. The main features of the contracts are described in Annex 3-3; two important ones are that (a) part of each firm's remuneration would be linked to performance, and (b) the foreign firms would train local managers for the - 25 - two EEAs so that they could gradually assume greater responsibilities and ultimately be able to manage the EEA. The two EEAs would be managed at least for 9 years by internationally recruited management firms whose experience and terms and conditions of employment would be satisfactory to IDA. 66. The two EEAs, Bela Vista and Uba Budo, would each be under the direction of a Supervisory Committee according to procedures spelled out in the management contracts. Each Committee would include representatives from MADR and other concerned government ministries or institutions, the foreign firm, and possibly foreign partners. The Committee would normally meet at least twice a year. It would review the work plans and budgets for the following year submitted by the EEAs' general managers. The first annual work plans and budgets are being prepared by the foreign firms under PPF financing. On the basis of these plans and budgets, the general managers would have full authority to manage their respective EEAs. Assurances were obtained at negotiations that by September 30 of each year the EEAs would furnish to IDA their draft work plans and budgets for the following year and projections for the subsequent year, as well as an update on the five-year investment programs (para 92(j)). 67. Although the management contracts would provide an acceptable legal framework for EEA operation in the short-term, statutes should be prepared to operate the EEAs legally and to open opportunities to find investors in the future. Assurances were obtained at negotiations that, by December 31, 1987, the Government would submit to IDA for its review and approval, draft statutes for the Bela Vista and Uba Budo EEAs and that these statutes once approved would not be amended without IDA's prior approval (para 92(k)). 4. Interim Review 68. An interim review would be made by IDA, the Government and key project beneficiaries by December 31, 1989 to (a) assess progress in the project components; (b) discuss and agree on steps to take to resolve problems encountered during implementation; (c) assess the possibilities of extending the role of the foreign firms to other EEAs; (d) discuss and agree on a plan to carry out institutional reforms in applied research, training and agricultural services; and (e) review whether the internationally recruited project coordinator would be retained for the full project duration. Agreement was obtained during negotiations on the objectives and scheduling of the interim review (para 92(1)). H. Production, Markets and Prices 69. Technical Aspects. The planting schedule would include a combination of rehabilitation of those areas in Bela Vista and Uba Budo EEAs where existing trees are in fairly good condition. Other aroas would be replanted with high-yielding Upper Amazon hybrids. Given the positive results experienced in other countries, the richness of STP soil, and the - 26 - presence of foreign experienced firms managing the EEAs., a yield of 1,500 kg/ha in Bela Vista and 1,620 kg/ha in Uba Budo is projected by the 9th year in the replanted areas, 900 kg/ha in Bela Vista EEA and 800 kg/ha in Uba Budo EEA by the 6th year in the rehabilitated areas. A summary table of the technical parameters used is presented in Annex 3-4 and details are in Project File No. 229.376. 70. Markets and Prices. Although cocoa represents 90% in value of all exports, STP only supplies 0.2% of the world market. The Government's strategy to increase production to 7,000 tons by 1990 and 12,500 tons by 1995 would have no effect on world prices. Under the project, the production of Bela Vista and Uba Budo ERAs would increase from an estimated 850 tons in 1986 to about 2,100 tons in 1993 and level off at 4,000 tons in 1998. Should additional financing become available over the 1988-90 period, production under this project can be expected to increase significantly by 1995. At present all the cocoa produced is sold FOB Sao Tome and its principal buyers are intermediaries. Traditionally the Netherlands has been the largest importer of STP cocoa, representing 45% of total export in 1984 and since, 1982, the Democratic Republic of Germany has been importing a substantial amount (32% of total export in 1984) under a barter arrangement. 71. Future prices and revenues to be received by STP, however, depend an the state of the world market. The Bank forecasts an increase in world supply of 1.7% p.a. and in world demand of 1.9% p.a. from 1985 to 2000, i.e., a rough long-run balance between supply and demand. With the v:srket currently in an oversupply position, however, prices appear to be continuing on the downward trend that started after the boom of the late 1970s. This trend was interrupted during the last three years, as prices rose due to shortfalls in Western Africa production, but prices are expected to continue falling until ai. .n4 1990, when they should rise again. In constant 1986 cents/kg., ...e price is expected to drop from 207 in 1986 to 184 in 1990 and rise to 202 in 1995. 72. Producer Price. From 1979 to 1984, producers received a fixed price from ECOMEX of 60 Db/kg which was raised to 65 Db/kg in 1984 and 71 Db/kg in 1986. Government has confirmed its intention to abolish fixed prices. The effects of cocoa-related taxes on the financial viability of the two plantations would be monitored during project implementation (para 83). STP cocoa price projections are in Annex 3-9. I. Financial Results 1. Introduction 73. The present section analyzes the expected financial results after devaluation of the two revenue-earning entities supported under the project, respectively the Bela Vista and Uba Budo EEA.. Subject to the investments and reforms proposed under the project, the two ERAs would be - 27 - financially viable and self-sustaining, although the present institut-onal setting is not optimal. The latter point, in particular the recommendation of changing the statutes of the EEAs from state enterprises to mixed-economy enterprises, is discussed in para 23. The other main factors affecting the financial results of the two EEAs are (a) the quality of its management and its ability to operate independently, and (b) cocoa prices. 2. Past Performance and Present Position 74. Since 1980, the EEAs have been incurring losses and have accumulated extensive debts from BNSTP. As of November 24, 1986, Bela Vista owed about Db 65 million to BNSTP and Uba Budo owed about Db 69 million. The settlement of these debts, or their eventual conversion to equity or quasi-equity, is important to ensure the long-term financial viability of the two EEAs and to ensure that the debt service coverage ratio would be low enough to attract lenders and investors. Conditions of effectiveness and disbursement related to the settlement of outstanding debts are described in paragraph 28, and other financial covenants are detailed in paragraph 83. 3. Future Financial Performance 75. In these analyses, it was assumed that all external financing for the two EEAs would be passed on by the Government as equity. The management contracts would ensure that if loans were undertaken, the foreign exchange required for the timely repayment of these loans would be retained in the foreign exchange account of the EEAs (Annex 3-3, page 5). In this case, the financing plans for both Bela Vista and Uba Budo would be appropriately modified, with IDA's approval (para 83). 76. Other Assumptions. Assumptions concerning cocoa prices are given in para 70. Revenues from cocoa sales accruing to the EEAs were taken after direct agricultural taxes, which amount to about 19% of FOB prices. Capital and operating costs are based on realistic estimates, including physical contingencies of 10% on capital costs. These costs comprise all costs directly imputable to cocoa production, except workers food crop development and social infrastructure investments, since they are considered part of the general social expenditure program that the Government is implementing for the country. The costs and revenues from other crops have been excluded because of lack of data, but the financial analysis shows that the EEAs would be viable on cocoa production alone. Labor costs were based on estimates of days worked, including provisions for incentives (para 34). Prices were converted into dobras equivalent at the exchange rate expected to prevail after devaluation in the first half of 1987 (US$1-Db 76.55). Forecasts were made for 25 years, which cover project implementation (5 years) and provide enough time to demonstrate the impact of the project. They are shown in constant 1986 terms. This does not introduce distortions in the analysis because (a) differential effects on changing cocoa prices and inflation in STP are not expected to be - 28 - significant due to expected periodic adjustments in the exchange rate, and (b) no long-term loans repayable during the forecast period are assumed in the financing plan. Finally, taxes on income have not been taken into account. 77. Financial Forecasts - Bela Vista. Detailed projections of income statements and fund flows are in Annex 3-10. No balance sheet has been prepared as no value for existing assets is available (para 57). Projected financial indicators (rounded, in 1986 constant terms) are shown below: PROJECTED FINANCIAL INDICATORS - BELA VISTA Calendar Years 1987 1988 1989 1990 1995 2000 Cocoa Sales (Tons) 550 630 840 1,050 1,560 1,530 ------US$ Million Equivalent---- Gross Sales 0.8 0.9 1.1 1.4 2.1 2.1 Production Costs 0.7 0.7 0.7 0.8 0.9 0.9 Net Income 0.2 0.2 0.4 0.6 1.3 1.2 Annual Cash Flow 0.0 0.0 0.0 0.2 0.7 1.0 Cumulative Cash Surplus 0.0 0.0 0.0 0.2 3.5 8.8 Direct Agric. Taxes 0.2 0.3 0.3 0.4 0.5 0.4 78. A cash build-up occurs in the projections because they do not include provision for dividend payments and do not assume major reinvestment of surpluses in the form of future investment expenditures. Based on the above assumptions, the financial rate of return (FRR) on investments in Bela Vista, calculated over a 25-year ptriod in constant 1986 terms, would be about 18%. The EEA would be financially self-supporting from PY4 (1990). 79. There are few financial risks. A break-even analysis was carried out on cocoa revenues, capital and production costs, using an opportunity cost of capital of 10%. The additional cocoa revenues (up to 15% above market price) that would be obtained from Improved quality have not been calculated because of the many factors involved in their realization and, therefore, the difficulty in quantifying them. The FRR would be reduced to 10% if, each year over the projection period of 25 years: (a) cocoa revenues decreased by 171, or (b) capital costs increased by 21%. Foreign exchange risks are low because practically all revenues would be derived from the sale of exported cocoa and would be borne by the EEA. - 29 - 80. Financial Forecasts - Uba Budo. Detailed projections are in Annex 3-11 and have been prepared under the same general assumptions as for Bela Vista. Although satisfactory, the financial results are less promising than for Bela Vista because Uba Budo is a more degraded plantation and would need to be substantially replanted. This increases the relative investment costs and delays benefits. Projected financial indicators are shown below. PROJECTED FINANCIAL INDICATORS - UBA BUDO Calendar Years 1987 1988 1989 1990 1995 2000 Cocoa Sales (Tons) 330 390 460 490 1,770 2,750 -----US$ Million Equivalent… Gross Sales 0.5 0.5 0.6 0.7 2.4 3.8 Production Costs 0.6 0.5 0.5 0.5 1.1 1.2 Net Income (0.1) 0.0 0.1 0.2 1.3 2.6 Annual Cash Flow 0.0 0.0 0.0 0.0 0.7 2.4 Cumulative Cash Surplus 0.0 0.0 0.0 0.0 1.0 11.5 Direct Agric. Taxes 0.1 0.1 0.1 0.1 0.7 0.8 81. The same assumptions for Bela Vista (para 78) have been applied for Uba Budo and the FRR on investments in Uba Budo, calculated over a 25-year period in 1986 constant terms, would be about 12%. Because benefits would take longer to materialize, the EEA would be financially self-supporting in PY8 (1994). 82. As in the case of Bela Vista a break-even analysis (para 79) was carried out on cocoa revenues, capital and production costs, using an opportunity cost of capital of 10%; the additional cocoa revenues from Improved quality has not been incorporated in the calculations. The FRR would be reduced to 10% if, each year over the projection period of 25 years: (a) cocoa revenues decreased by 11%, or (b) capital costs increased by 12%. The same foreign exchange risks for Bela Vista applies for Uba Budo. Since Bela Vista's and Uba Budo's financial viability is sensitive to price fluctuations, assurances were obtained at negotiations that Government would monitor cocoa taxes, which are currently 19% of cocoa revenues, and ensure that they would not be raised beyond current levels in order not to affect the viability of the project (para 92(m)). The current cocoa tax system would be reviewed under the structural adtustment program and a flexible system which would ensure that both Government and producer share the burden of fluctuations of world prices would be established. - 30 - 83. Financial Covenants. To safeguard the financial integrity of the Bela Vista and Uba Budo EEAs, assurances were obtained from the Government at negotiations (para 92(n)) that, for each of the two ERAs: (a) no dividends would be paid without IDA's prior agreement before December 31, 1994 to ensure that adequate funds have been retained in the EEAs to meet their financial needs, including operations and replacement of equipment; (b) the ERAs would not contract any debt above US$100,000 equivalent during any 12-month period before December 31, 1996, except for short-term credit, without IDA's prior approval; and (c) the EEAs would not make any new investment unless such investment is technically, economically and financially justifiable. Any investment above US$100,000 not approved under the annual EEA's investment program would require IDA's prior approval. 84. Government Cash Flow. The Government cash flow, shown in Annex 3-12, would always be positive. The net foreign exchange earnings after debt service (if it were to remain full owner of the two EEAs and to receive all surplus revenue as dividends) would average US$0.7 million in year 5, US$2.3 million in year 10, anid US$3.9 million from year 15 onwards, in 1986 constant prices. J. Economic and Social Benefits and Risks 85. The economic rate of return (ERR) on the project's investments over 25 years is estimated at 21X, and is based on the production-related costs and benefits for Bela Vista and Uba Budo, which account for 66% of total project costs. Costs were estimated on the basis of economic costs (production and investment costs excluding taxes). A shadow exchange rate is not taken into consideration since the recent devaluation of the dobra eliminated much of its previous overvaluation. Requirements for further exchange rate adjustment would be monitored under the structural adjustment program. In parallel, agricultural workers' wages have been increased by 30%, which is the level acceptable to IDA under the proposed Structural Adjustment Credit after devaluation. The net present value at 102 opportunity cost of capital is about US$960,000 equivalent, and the switching value at 10% is -311 for benefits and +44% for costs. The economic benefits have been taken from tL2 value of production at farmgate price of the cocoa, excluding taxes. As with the financial analysis, the costs and other benefits of the other project components have not been included since it would be difficult to quantify their benefits although benefits are expected from the sales of coprah and oil palm. The results are summarized below: - 31 - SUMNARY OF ECONOMIC ANALYSIS (thousand dobras) Switching Value Economic Rate of Net Present at 10% Return (t) Value at 10% Benefit Cost Bela Vista 29 480,000 -33 49 Uba Budo 18 480,000 -28 40 Total 21 L62LQ02 4 86. About 1,500 workers working in Bela Vista and Uba Budo would benefit directly from the project. The improvement of social infrastructure would give them better living conditions. Workers would benefit financially from the new bonus system that they would receive in addition to their salaries. Furthermore, with technical and financial assistance to develop food crops, they would save on the purchase of food and their overall nutrition would Improve. Workers would have access to basic consumer goods through the general stores to be re-established by the foreign firms, and other stores which would be supplied through Imports financed under the proposed Structur_' Adjustment Credit (para 34). Employees of the other EEAs and up to 400 private producers would benefit financially from the increased revenues resulting from the project. In additiov, considerable indirect benefits could be expected from production increases in other crops grown on these plantations and from quality improvements in cocoa production elsewhere on the islands. Finally, a basis would be established for increased privatization in STP. 87. Risks. There are no unusual risks in the project. Although world cocoa prices have recently increased in dollar terms, they are considerably lower than those in the early eighties. Nevertheless, the sensitivity analysis shows that even with a 10% lower projection of prices over the whole life of the project, the project's ERR would still be 17Z, and with a 20% decrease the ERR would be 14%. If costs should increase by 10%, the ERR would still be 18%, and with an increase of 20%, the ERR would be 15%. 88. A possible technical risk would be the use of high-yielding hybrid varieties for replanting. Although they have been successful in other countries (yields of up to 2.2 tons/ha in Papua New Guinea compared with 1.6 tons/ha assumed under the project), they have not been tested on a large scale in STP. During project preparation, soil analyses carried out by IRCC (para 62), showed that STP soil is very rich and should be highly receptive to the hybrids. A nursery was prepared under PPF financing and the seedlings were planted in December 198F. The trees are adapting well. Only one EEA (Uba Budo) would undargo extensive but carefully phased replanting. The total replanted area under the project would represent less than 10% of the cocoa production area in STP and would be consiLdered on a pilot scale. As many of the trees are old and more and more countries - 32 - adopt the new hybrids, this may be the only alternative for STP to be competitive on the world market. The new technology does require intensive management and increased inputs since the trees are grown without shade and are more susceptible to diseases. To minimize this risk, the management contracts with the foreign firms are fcr 9 years with an option for a five-year renewal. 89. Possible delays in implementing Government's reforms appropriate for promoting an economic environment favorable to investment (para 23) are other risks. The initial devaluation would make the cocoa sector viable. The proposed Structural Adjustment Credit, which would be implemented in parallel with the project, would carefully monitor the implementation of the measures to restore macroeconomic equilibria (para 24). 90. Environmental Aspects. The project would be implemented with due regard to the environment and to occupational health. An Imminent environmental problem could arise from the use of agro-chemicals and from their concentration in streams. 91. To minimize these risks, the Government would (a) refrain from using chemicals considered by IDA to be detrimental to the environment; (b) before September 30, 1988, submit to IDA for its review and ai.lroval a plan to monitor and control chemical residues in streams and other parts of the biosphere; and (c) at all times, cause the foreign firms to train workers in Bela Vista and Uba Budo on the safe use of chemicals. Assurances on the above were obtained at negotiations (para 92(o)). In addition, a study concerning the overall status of STP's ecology would be carried out under the project (Annex 3-5). IV. AGREEMENTS REDACHED AND RECOMMENDATION 92. Agreements were reached at negotiations regarding: (a) implementation of measures ensuring that the EEAs have (i) management autonomy; (ii) flexible wage system; and (iii) flexibility in recruiting and dismissing staff (paras 12, 21, 34 and 72); (b) the pursuit of project objectives beyond the five-year period (para 26); (c) the timely payment of salaries to workers (para 34); (d) the workers' housing situation (para 37); (e) review of the system of import and sale of inputs and equipment to smallholders (para 49); (f) terms of reference for studies and consultancy services (para 51); - 33 - (g) the submission of accounts and audit reports to IDA (para 56); (h) the functions of the PSU (para 63); (i) terms of reference for the project coordinator and deputy project coordinator (para 63); (j) the submission of EEA draft work plans and budgets (para 66); (k) statutes for the Bela Vista and Uba Budo EEAs (para 67); (1) objectives and scheduling of an interim review by December 31, 1989 (para 68); (m) monitoring of cocoa sales tax rates (para 82); (n) financial covenants (para 83); and (o) the reduction of environmental risks (para 91). 93. Conditions of effectiveness would concern: (a) the effectiveness of the management contract with one of the two foreign firms, except for its cross-effectiveness condition with the IDA credit and the down-payment for start-up activities, the settlement of outstanding debts, and preparation of an acceptable accounting system of the EEA concerned (para 28); and (b) the establishment of the Project Support Unit and employment of its coordinator and deputy coordinator (para 63). 94. Conditions of disbursement would be that the other foreign firm and EEA would have met IDAts conditions of credit effectiveness (para 28 and 93(a)). 95. With the above agreements, the project would be suitable for an IDA credit of US$7.9 million equivalent. WAPAD May 1987 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - U n wFH - F -~~ro" SAO TOME AND PRINCIPE COCOA REHABIUTATION PROJECT TYPICAL ORGANIZAMON CHART FOR A STATE ENTERPRISE FOR AGRICULTURE AND UVESTOCK (EEA) * UMSNU PMDVSUOU -~_ I .. [en~~~~~~A"U WAPAD February 1987 WORLO BANK 30339C cn -4 H~~~~~~~~~~~~~~~~~~~~~~~~~~- i-i-4 >- I I tJ w >~~~~~~~ z t - 37 - Annex 2-1 SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT HISTORICAL EVENTS 1471 The Portuguese arrive on the islands. 1501 Introduction of sugarcane. Between 1511 and 1520, the price of sugar doubled on the European market. 1644 End of sugar boom. Massive departures to Brazil. 1855 Introduction of cocoa on Sao Tome. 1857 Introduction of tobacco, then cotton (1860), bread fruit (1862), cinchona (1869), millet and pepper (1870). 1875 April 29: Abolition of slavery. Importation of workers. 1880 Production: 1,718 tons of coffee and 467 tons of cocoa. Cocoa is planted on a large scale. Population: 21,000 inhabitants on the two islands. 1907 International debate on forced labor in Sao Tome. Cocoa boycott. 1908 The largest British chocolate producer goes on a fact-finding mission to Sao Tome. Production: 23,000 t of cocoa and 1,100 t of coffee. 1913 Sao Tome is the world's largest cocoa producer: 37,000 tons. 1919 Production: 35,000 t of cocoa and 400 t of coffee. 1960 Production: 10,200 t of cocoa and 250 t of coffee. 1970 Production: 10,000 t of cocoa. 1972 Foundation of the Movement for the Liberation of Sao Tome and Principe (MLSTP). 1975 July 12: Independence December 12: The Constitution becomes effective. 1977 September 8: Monetary reform. Establishment of official currency: the Dobra, pegged to the SDR. 1978 STP becomes member of IMF/World Bank. 1985 STP holds a Donors Round Table Conference and presents its Development Plan (1986-1990). Donors pledge coordinated support to STP's development efforts. Source: Ministry of Cooperation, December 1985. WAPAD May 1987 -4 l i ~-4 Iz I 39 Annex 2-2 SAO TOME AND PRINCIPE COCOA REHAILITATION PRQJECT PRODUCTION CONSTRAINTS Two types of technical constraints (short- and medium- to long-term) would be addressed under the project by strengthening the management of the EEAs, training local management staff and providing laborers with incentives. Short-Term Constraints Inefficient maintenance of the plantations results in trees and shoots competing with weeds, and in brush encroachement starting a few meters from the feeder roads. Depredator insects multiply and provide infectious niches, especially for Phytophtora, in the unpicked rotten pods. Since all plantations grow under high forest canopy, shade is not controlled. Irregular sunlight spots favor weeds and depredator parasites. However, the most severe problem is excessive cocoa pruning which results in a lack of auto-shading for soil protection and photosynthetic activity. The insufficient sucker removal leads to the growth of many shoots, notably during blossom and fruit setting time, which in turn leads to the occurence of numerous parasites and difficult harvest. The Inefficient plant protection is due to insecticides and pesticides applied with old and disrepaired equipment which does not provide adequate coverage, and also tractor-mounted spraving equipment used only along feeder roads. Protec. on against black pod is inadequate. Chemical treatment is not efficient due to few sprayings and the inappropriate application of fungicides. The lack of support to private smallholders has forced them to practice cropping without inputs, plant protection products, and equipment (sprayers). Nevertheless, plantations are well maintained, and availability of these Items and, technical support would some enable them to increase their production significantly. Medium- to Long-Term Constraints The insufficient tree density (400-900 instead of 1,000), the reduced production due to the old age of rilantations (25-60 years), and the genetic disparity of trees which results in heterogeneous products would justify the replanting of all plantations. The cost and hardship of cropping on steep slopes justify the elimination of cocoa trees from these areas. The diversification of some plantations toward bananas, plantains and tarot cultivation calls for a rural rezoning within the EEAs and clearly defined procedures concerning the allocation and utilization of laborers' food crop plots. These recommendations are included in the proposed project. Further details on production constraints are given in Project File No. 228.967. WAPAD May 1987 - HI s~~~~~~~ G z ~~~~~~~~~~~~~~~~~ -4 & " I I z ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 41 - Annex 2-3 Page 1 of 3 SAO TOME AMD PRINCIPE COCOA REHABILITATION PROJECT MAIN INSTITUTIONS The Ministry of Agriculture and Rural Development (NADR) is the main institution in charge of the agriculture sector whose production comes mostly from the EEAs. Since cocoa production affects all aspects of the economy, other government institutions are also responsible for policies affecting the BEAs. Rowever, a lack of well defined responsibilities among them has resulted in inefficiencies, with negative effects on cocoa production. The functions of the main institutions responsible for the cocoa subsector are as follows: (a) The Ministry of Agriculture and Rural Development is responsible for the overall development policy in agriculture (except fisheries), for the administrative and technical supervision of the EEAs, and for the provision of equipment, spare parts and inputs to the plantations (MADR's Organization Chart is on page 3 of this Annex). (b) The Ministry of Planniag which is in charge of the country's overail economic planning the revenues from cocoa sales is a key determinant In the planning process. (c) The Ministry of Finance and the National Bank of STP is responsible for financial planning and its State Enterprises' Finance Division supervises the EEAs. It monitors revenues and expenditures, advises on accounting procedures, and controls compliance with the planning targets of production, expenditures and Investments for the only bank in the country which operates as the Central Bank, the Treasury, and a comercial and development bank. At the commercial level, it deals with credit, external debt and the current accounts of the EEAs, which it occasionally assists financially. (d) The Ministry of Commerce, Ind-tstry and Tourism is also responsible for ECOMIN, which sells imports purchased from ECOMEX at officially set prices, and for ECOMEX, which is in charge of exports and imports. (e) The Ministry of Cooperation is responsible for all STP's foreign policy and diplomatic activities, as well as for dialoguing with bilateral and multilateral development organizations and seeking their financing for development projects in STP. T - 42 - Annex 2-3 Page 2 of 3 (f) The Agricultural Experimental Station of POTO was established in 1960 and functions as a department of MADR. It is responsible for applied research and technical support to the sector. Its Impact has been limited. It has received some technical assistance from FAO and laboratory equipment from the Dutch Government. However, little other investment has been made and the administrative building and annexes of technical offices and laboratories are in poor condition and lack equipment. At present there are some 70 positions staffed with underqualified personnel, and morale is low due to poor working conditions and lack of funds to carry out the work. (g) The Mesquita Project for food crop extension, which is not formally established, falls under MADR's responsibilitye It is, however, expected to become a permanent center for food crop extension In 1987. Since its Inception in 1981, FAC/AFVP has disbursed FF 12.1 million for the development of 100 ha of vegetables, provision of seedlings, inputs and tools for small farmers, and technical assistance for extension services. A further FF 2.2 million has been approved to extend the project through the beginning of 1987. A third phase is in the process of being approved to cover a three-year period (1987-89) to increase extension activities, particularly to work with those plantations receiving external assistance (Uba Budo, Bela Vista, and Santa Margarida). It will also start some agricultural experimentation and multiplication of seeds. Note: There has been frequent reorganizations of the ministries and the above composition represents the latest reorganization (January 19, 1987). VAPAD Nay 1987 _-3 Annex 2-3 Pa8e 3 of 3 i W~~I I,iSa ilH IIX -I H rn I X-i-4 z I D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 45 - Annex 3-1 SAO TOME AND PRINCIPE COCOA RMTAbTLITATION PROJECT THE BELA VISTA STATE ENTERPRISE The Bela Vista state enterprise is located in the northeastern part of Sao Tome, about 6 km from the capital (Map IBRD 19574). The soil is generally fertile and the topography is rather flat, with a few peaks in the southwest. It is one of the larger enterprises of the country, covering about 4,000 ha, of which the 3,200 ha under cultivation consist of 2,100 ha of cocoa, 500 ha of oil palm, 450 ha of coconut and a little over 150 ha of food crops. Although Bela Vista was the largest cocoa producer until 1982, it ranked only fifth by 1984, because of rainfall shortages that year and the breakdown of its irrigation system. Before independence, Bela Vista was under Portuguese ownership and management. The plantations were young, well-irrigated and drained, and their density vell-controlled. Irrigation is being used again since 1984, thanks to the new manager whose 20 years of experience in STP plantations familiarized him with the adverse effects of deficient rainfalls (droughts of 1982-84) on Bela Vista production. An analysis of production data for 1980-84 shows that: (a) In 1980, Bela Vista was the largest cocoa producer of all the EMAs, with 1,077 tons (or about 15Z of STP production) and an average yield of 512 kg/ha, compared with disparate averages within the enterprises of 220 kg/ha in the Gratidao dependency and over 1.000 kg/ha in the Vale Flor dependency. (bl During 1982-84, when rainfall shortages were not compensated with irrigation, Bela Vista production plummeted, especially in the lowlands (Vale Flor, Praia Nazare) here rain deficits were most severe. (c) Production in rugged zones (Gratido, Santarem) is low due to soil erosion, low maintenance levels, and difficulty of access; therefore, these plantations should be eliminated, as recommended under the project. Bela Vista production is hindered by the same constraints facing other EEAs, such as insufficient management capacity and lack of funds to purchase inputs and machinery. It is particularly affected by (a) the marginal rainfall level, and (b) the low productivity of the labor force. Rainfall shortages can be resolved at minor costs by rehabilitating the gravity irrigation system. To alleviate these problems the project would finance a foreign firm to undertake the management of Bela Vista and alsi the investment program. Labor productivity is low due to the present lack of Incentives (2.5 ha of cocoa and 3.8 ha of plantations per laborer). To stimulate productivity, the project would provide monetary and social incentives to workers to improve their standard of living. More details on the Bela Vista state enterprise are given in Project File No. 228.967. WAPAD May 1987 0 z H9 - 1Ev 47 - ~~~~~Annex 3-2 SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT THE UBA BUD0 STATE ENTERPRISE The Uba Budo state enterprise is located in the eastern part of Sao Tone, south of the capital (Nap IBRD 19574). The soils are fertile and the topography has more relief than In Bela Vista. Uba Budo is the second state enterprise in the country in terms of area under cultivation, i.e., almost 3,400 ha, of which 2,300 ha of cocoa, 450 ha of oil palm, 400 ha of coconuts, and 250 ha of food crops and other cash crops. Its cocoa production is below average (130 kg). Although rainfall is more favorable to cocoa production than In Bela Vista, simple irrigation systems could be considered in the lowlands as recommended under the project. Unlike Bela Vista, Uba Budo was divided into many enterprises before independence. Their merging in 1975/76 resulted in a more dispersed network of dependencies, production systems and infrastructures. A recent analysis of Uba Budo's area, production and yields for 1983 shows that cocoa plantations have somewhat deteriorated. In 1983, only three dependencies had an average yield above 200 kg/ha. In four others the average yield was below 100 kg/ha, probably due to deficient maintenance and insufficient plant protection. Technical constraints are the same as in Bela Vista, except for the more severe labor shoz-tage (4 ha of cocoa and 6 ha of plantation per productive laborer). The project would finance a foreign firm to undertake the management of Uba Budo and the investment program to rehabilitate the plantation. It would provide the same incentives for laborers as in Bela Vista. More details on the Uba Budo state enterprise are given in Project File No. 228.967. WAPAD May 1987 .0. z I "-,l H - IF Ev A,1^ - 49 - Annex 3-3 Page I of 8 SAO TOME AND PRINCIPE COCOA REHABILITATION PROJECT MAIN FEATURES OF THE MANAGEMENT CONTRACTS Two separate management contracts were negotiated in December 1985 signed on May 13, 1987 between the "Francisco Mantero - Agricultura e Com6rcio Internacional, S.A." and the Government of STP for Bela Vista ERA, and between SOCFINCO-FRANCE, S.A., and the Government of STP for Uba Budo EEA. The contracts are between the foreign firms and the respective EEAs with a guarantee from Government. Initially, the original version of the contracts Included a preparatory phase of five months to be effective in March 1986, and a full phase of ten years. But since IDA could not endorse the draft contracts while the financing package remained Incomplete, and the macroeconomic distortions in the country unresolved, separate short-term contracts have been prepared between the same parties and are being financed under the PPF and supplemented by the Line of Credit for Economic Rehabilitation and Modernization (Cr. 1590-STP); activities have started as scheduled. The main features of the contracts of the preparatory phase and those of the full-term contracts incorporating IDA' a comments are described below. First Preparatory Phase Contract This five-month contract was not interpreted by either party as a commitment to enter into the full phase contract. Under this contract the foreign firm: 1. prepared and presented a full implementation study of the proposed rehabilitation and modernization program of the EEA, which included a full assessment of the existing trees, infrastructure, equipment and personnel, and a work program for the following five years; 2. prepared and presented a detailed work plan and budget for the first year of the project; 3. based on the review of existing personnel and future needs, held discussions with the Government on the course of action required to ensure the employment of the necessary number and right categories of staff at the start of the full scale project; 4. in the case of Bela Vista, obtained an endorsement of the technical proposal by a reputable scientific Institute specializing in cocoa, acceptable to the Government; 5. established a nursery which would cover the needs of the first year requirement for replanting. - 50 - Annex 3-3 Page 2 of 8 Second and Third Preparatory Phase Contract Since the project processing was suspended because of t:e rapidly deteriorating situation of the economy and the need to review the macroeconomic situation of the country, two extensions of six months each for the preparatory phase contracts were approved. Under these contracts the foreign firms are required to: 1. clear the land, plant the seedlings and maintain planted areas; and 2. set up an accounting system which would be acceptable to external financiers by July 1987. Full Phase Contract Subject to the satisfactory completion of the preparatory phase and availability of financing, the main features of the full-length contract are described below. Objective Rehabilitation of the agroindustrial complex of the EEA and its optimal exploitation on a sustainable basis. .Duration of Contract The contract is of 9-year duration with an option for a 5-year renewal. Activities The principal activities for the foreign firm to reach the objective described above are: 1. to rehabilitate and modernize the plantation (including the improvement of existing infrastructures, renovation of existing ones and purchase of new equipment), using technologies which are modern and most appropriate to the plantation and Saotomean conditions; 2. to provide technical assistance and training; 3. to rehabilitate and replant cocoa; 4. to study, recuperate and plant other parallel or complementary erops and food crops as appropriate, using socioeconomic critieria; and 5. to market the production of the plantation. - N1 - Annex 3-3 Page 3 of 8 Obligations of the Foreign Firm The foreign firm's obligations are: 1. to take full management responsiblity of the ERA and execute the specific sub-activities encompassed in the activities described above; 2. to transfer technology through technical assistance and training so that the ERA staff will be progressively in a position to operate the plantation and market the cocoa efficiently; 3. to take into account at all times the environmental aspects of their activities; and 4. to enter int. a formal agreement with a reputable scientific institute specializing in cocoa, and to obtain information on the most advanced and appropriate technology to apply to the EEA. Obligations of the Respective ERAs The principal responsiblities of the EEA are: 1. to ensure that all the nscessary funds specified in, and approved under, the annual budget for the execution of the work plan will be made available (in an account In the name of the EEA at BN$STP) to the foreign firm to utilize in the name of the EREA; 2. to ensure that at least 302 of the value of sales of the ERA in convertible currency will be made accessible to the foreign firm (the mechanism for this is described below under foreign exchange); 3. to ensure, to the extent possible. that payments from external financiers will be made directly to the foreign firm and to the external suppliers as appropriate; and 4. to provide at all times relevant and necessary information and assistance (particularly In the selection of local staff) for the successful execution of the activities of the foreign firm. Authority of the Foreign Firm The ERA will entrust the foreign firm with all the necessary direct authority to manage the plantation efficiently and without Interference from the Government in its day-to-day operations. For the procurement of contracts funded by external financiers, the foreign firm will be bound by the regulations of the financiers concerned. Within the bounds of these regulations, the foreign firm will give preference to local suppliers. The foreign firm will have the right: - 52 - Annex 3-3 Page 4 of 8 1. to market all the cocoa produced directly in the name of the EEA; 2. to recruit and discharge personnel at all categories, assign their duties, set the conditions of employment and remuneration including the establishment of a bonus system. Also, exercise the authority to discipline personnel in conformity with existing STP labor legislation and with labor rules that the foreign firm may establish; 3. to make purchase orders and collect rent in the name of the EEA; 4. within the limits of the approved budget, to purchase directly or transfer goods and other items, namely (but not limited to) equipments, materials, inputs and petrol; 5. to open, make deposits, and withdraw from bank accounts foreseen in the contracts in the name of the ERA; and 6. to receive all sums due to the EEA and make payments in the name of the EEA within the duration of the contract. Remuneration of the Foreign Firm The contract is divided into an investment phase of 4 years and an operational phase of 5 years. The fees payable are broken down as follows: 1. The Investment Phase (a) a fixed annual fee on a declining scale (this was set under the assumption that the number of permanent expatriate staff would decrease as they are gradually replaced by trained national staff); (b) a variable fee which is set at a fixed sum payable per hectare planted or rehabilitated (the definitions of what is considered planted and rehabilitated are spelled out in the contract); and (c) a bonus payment in one contract and a withholding of a portion of the fee in the other contract have been included, which will be payable only at the end of the fifth year upon the satisfactory performance of the foreign firm (the definition of satisfactory performance is spelled out in the contract); ~ 53 ~ Annex 3-3 Page 5 of 8 2. The Operational Phase (a) 32 of the FOB value of sales over the incremental production, with the base year being 1986.; (b) 10% of gross profits calculated before depreciation, financial charges, reserves and taxes; and (c) a minimum that would be payable if the sum of (a) and (b) is below that minimum. 3. Miscellaneous (a) relocation costs of the expatriates; and (b) housing and transportation for the expatriates. Marketing The foreign firm will be fully responsible for the marketing of the production of the EEA. For this purpose: 1. it will seek at all times the buyer with the highest rate, obtain Government's previous approval, and process all the necessary transactions to complete the sale; 2. it will receive a commission of 1.8% of the FOB sale price; and 3. it will be required to report and record the transaction imediately after it has been made, and these records will be subject to periodic audits. Foreign Exchange A portion of the proceeds from sales will be deposited into the accounts of the ERA, in BNSTP and another portion in an account abroad, according to the follvwing conditions: 1. at least 302 of the value of sales would be deposited in a freely convertible currency in an account abroad; 2. if there is continued lack of consumer goods from local channels for the workers, a specified amount (to be previously agreed upon by the Supervisory Committee in consultation with Government), will be retained in this account for the import of these goods directly by the foreign firm under EEA's name; 3. if the EEA undertakes a eommercial loan, the required amount for timely debt service will also be retained in this account; - 54 - Annex 3-3 Page 6 of 8 4. the foreign firm should abstain from any gains that could be obtained by associating itself with banks abroad; 5. the deposited value will be designated for the exclusive use of the project; and 6. the foreign firm will have to submit annually to BNSTP the statements from the account abroad, so that BNSTP can monitor the foreign exchange flow. Local Personnel The following applies to the foreign firm: 1. it will not be responsible for the continuing employment or for settling past claims of personnel actually employed on the plantation; 2. it will choose, following objective criteria, those staff and workers who should continue in the service of the EEA and others who would be recruited; 3. it will pay the personnel in the name of the EEA; 4. it will have access to obtaining, in the name of the ERA, necessary supplies locally and abroad if the conditions specified in the above section on foreign exchange (point 2) prevail, which will be sold to workers through a general store that would be re-established; 5. it will not hare the authority to expel retirees presently living on the plantation, without the express authorization of the competent authorities; and 6. it will establish a personnel policy that will be adequate to improve the qualitative and quantitative production and productivit!y through incentives, while observing the minimum legal limits. Internationally Recruited Staff The following are obligations of the foreign firm with regards to expatriate staff: 1. in order to properly manage the plantation, the foreign firm will be required (within the fees payable to it) to employ at least five management staff (general manager, plantation manager, director of industrial and mechanical sector, director of administration and finance, and supplies and procurement chief). - 55 - Annex 3-3 Page 7 of 8 At least eight supervision missions by adequately qualified personnel from the firm's headquarters will be made per year during the first four years, and at least five supervision missions per year for the remaining five years; 2. the foreign firm will select at least one counterpart for each of the management staff who will be trained to eventually replace them; 3. the foreign firm will submit the curriculum vitae of their candidates for the approval of the EEA's Supervisory Committee and the financiers; 4. the foreign firm and its management staff will be prohibited from engaging in any other professional activities not specified under the contract without specific authorization from the Supervisory Committee; 5. if for any reason a management staff prematurely terminates his contract in STP, the firm will be responsible to fill that post within 60 days with a candidate of equivalent qualifications whose CV will have to be submitted to the Supervisory Committee; and 6. the Supervisory Commitee will have the righc to request the substitution of any employee of the firm vho has been found to be acting against the morals, good customs, and laws in force or to be incompetent. Reporting Requirements The foreign firm will be required to provide full documentation and reports on all its activities. This will include quarterly and annual progress reports. Supervisor_ Committee A five-member Supervisory Committee will be established in each ENA (three designated by the Government and two by the foreign firm) and a chairman will be elected. The Committee will meet at least twice a year and will have authority to: 1. review and give its opinion on the annual work plan and budget submitted by the foreign firm; 2. at the end of each year, assess the performance of the foreign firm against the approved work plan and budget approved for that year; and 3. review and advise on any issue that may arise on policies Internal to the EEA. - 56 - Annex 3-3 Page 8 o8 Termination Clause The following are conditions for the termination of the contract: 1. in the case of "force majeure", the concerned party will Immediately notify the other, and a meeting of the Supervisory Committee will be held to seek an acceptable solution to both parties; 2. if either party fails to meet its obligations under good faith, the faulty party will receive written notice from the other party and will have to remedy the situation (in 60 days in the case of the foreign firm and 90 for Government); its failure to do so will be considered suff'cient grounds for cessation of contract; 3. either party may turn to the International Center for the Settlement of Investment Disputes in Washington for arbitration if an amicable solution cannot be found by the parties concerned; and 4. the foreign firm may transfer some of its rights and obligations to a third pirty, subject to written agreement by the EEA and provided that the foreign firm remains solely responsible for the good execution of the project. Conditions of Effectiveness of the Contract The following are conditions of effectiveness of the contract: 1. delineation of the territory of the EEA; 2. obtention of adequate financing for the proposed investment program in the EEA; and 3. official publicatioa of the legal instrument approving the contract. WAPAD May 1987 - 57 Annex 3-4 Page I ot 2 SA 101U AND MPRXNC! CUOQ, URAITTAON PUJ? hRC1ICAL PROWCTIOlN PARAMRS Cuhative Coco Pla oting chdule Belta Vista YRI n2 113 TR4 tRS eplualtig 60 120 180 180 180 Penetficatton 66 132 198 198 198 Rehabilitation 1,357 1,357 1,357 1,357 1,357 Maintenae before replanting or deaification 22 ,126 0 0 0 Total Lba 3a,do Replasting 1N0 50 900 1,300 1,500 Desfication 20 300 300 300 300 Mainteance before replanting 1.680. 1.40 600 200 0 Total 'J J" Yields k Bela Vista R2 YR 1 15 Y6 YRB YR9-10 YR-1 Y-4 YR11 Y5 16-25 eplaAnting 200 100 50 150 360 600 900 1,300 1,500 1,500 1,500 1,500 1,600 Densification 280 350 400 500 700 900 1,000 1,100 1,200 1,200 1,200 1,200 1,100 Rebabibitation 330 450 650 750 850 850 850- 850 850 800 750 700 700 Maintenance before r5plantiag 300 350 400 425 Uba Budo Repnting 90 70 50 300 675 940 1,200 1,4710 1,620 1,680 1,6 1,680 1,680 Densification 150 300 600 800 800 S00 800 800 800 800 800 800 800 Mtinteance before replanting and dentification 17S 250 300 350 Cost and Price Peters Cost ousan aobra Bela Vista 'R1 112 - R3 YR4 IRS Replantiag 78 37 37 38 38 Deneification 63 47 42 32 31 Rehabilitation 35 35 25 25 25 Maintenance before replanting 15 14 15 15 15 ,Uba udo Rap?anting 45 18 18 27 32 Deoaification 43 33 39 41 41 Maintenance before replantin nd densflcation 22 24 25 29 29 Bela Vista m 132 n u I 135 TV6 137 , 1 10 TMD TM 313 1314 1 U35 36 11725 Replanting 12 18 21 16 48 81 126 168 222 2S5 270 270 270 270 270 276 28 Dawific.tfcp 10 42 66 as 106 139 172 19 218 231 230 236 23 235 238 231 22 Nlalteance befote replantieg 76 44 - - - - ' ' ' ' ' ' lihabilUt tic 448 I S8"2 1.018 1.153 LI.S3 1.153 L.153 _1.153 1.2$i 10 6 1.086 . OM I oM Total Productican &Z W Lu a5a a .aa'IaM UM AAA 121UN2' 1.1 WU 2i MU M ,Uba Btd Replanting 9 43 69 114 254 .518 696 1,333 1,741 2,072 2,316 2,454 2,50 2,526 2,520 2,520 2,520 Densficattoa 45 90 180 240 240 240 240 240 240 240 240 240 240 240 240 240 240 0 tatntenaace before replaastg 29 300 240 140 - _ * - . - _ _ - _ - Total Productim a 3 i *1 g iff 14 1.W 12 21 32 La 2* 3d 3dM 3.3W 26i 3.32 WAPAD February 1987 Ill - 59 - Page 1`of 10 SAO TOME AND PRINCIPE COCOA REAUIITATION PROJECT TERMS OF REFERENCE FOR CONSULTANCY SERVICES AND STUDIES A4ricultural Credit Summary Background At present. there is only one banking institution in Sao Tome and Principe (STP), the Banco Nacional de SIP (BNSTP). It serves as the country's Central, Cowmercial, and Development Bank. Among its objectives, the project would seek to promote the restructuring of the Agricultural State Enterprises to operate as Independent entities paving the vay for their eventual partial or total privatization and encourage private farmers in investing In agriculture. Government has taken steps towards this with the promulgation of an investment code in March 1986. A further step would be to develop an agricultural credit system to serve the investment needs of the agricultural enterprises and private farm4rs. An agricultural credit study would be undertaken under the project for this purpose. Objectives The study would: (a) examine the role that credit could play in the development of the agricultural sector and identify the sub-sectors and tyrpe of potential recipients for agricultural credit; (b) formulate objectives for the short, medium, and long term for an agricultural credit program, and indicate the priorities attached to these objectives; (c) assess the need for establishing a mechanism for providing agriculture credit, such as the establishment of an agricultural credit section In BNSTP; (d) prepare a detailed proposal concerning the organization of the mechanism recomended in (c), specifying the hierarchichal and functional linkages, and the personnel needs for the next five years; (e) Identify and prepare a training program for the personnel required to implement the proposed agricultural credit program; \ - ~~~~~~~~~~~60'- -60- Annex 3-5 Page 2 of 10 Revlew the current marketing process including the timing and cost involved in each of the steps indicating: (a) in general terms the procedures which would be followed for the funetioning of the agricultural credit program (in particular the arialysis of loan requests, the monitoring and control of operations, and the recuperation of debts); (b) the criteria for granting loans to different types of beneficiaries (agricultural enterprises and private farmers), the interest rates, the reimbursement period, the guarantees that would eventually be demanded of the borrowers, appropriations of foreign exchange to finance imports, and of local currency to finance local expenditures; (c) the technical assistance necessary (with the terms of reference for the principal experts proposed), during the next five years, in order to permit the agricultural credit section to operate satisfactorily and train its personnel; (d) an estimate, over the next five years of the expenses linked to the reinforcement and the functioning of the agricultural credit program, including the technical assistance, the local personnel, training, the renovation and equipping of the office and operational costs; and (e) a calendar of actions proposed. Qualifications An agricultural credit specialist with proficiency in Portuguese or with working knowledge of Portuguese with proficiency in Spanish or French. Duration It is estimated that:a total of 7 weeks will be required, with 4 weeks in STP and the remainder for r-avel and report writing. Reporting The consultant should provide fifteen (15) detailed final report covering all the above points to the Project Coordinator who will dispatch them to the appropriate recipients. WAPAD May 1987 - 61 - Annex 3-5 Page 3 of 10 Cocoa Marketing Suumary Background At present ECOMEX, which is -n.der the MiniiAry of Foreign Trade, is in charge of all aspects of cocoa marketing. It purchases the cocoa at a fixed price from the Agricultural State Enterprises. It is responsible for the transport, storage and phytosanitary protection, sales to the foreign buyers, placement at customs, and shipment of cocoa. Given its marginal position in the cocoa market and its isolation, STP might not be receiving the optimum price for its cocoa in terms of grading, stock level, invoicing, timing of sales and choice of buyer. A study would le undertaken under the project that would assess the present rarketing process of cocoa in STP and review the options available in each if the steps involved for improving revenues from cocoa sales. Objectives Review the current marketing process, including the timing and costs involved in each of the steps indicating: (a) how and by whom cocoa is graded at the time of bagging both with the Agricultural Enterprises and private farmers; (b) when and how the sales transactions are made with ECOMEX, and their form and timing of payments to the enterprises and private farmers; (c) how transportation arrangements are made, who makes them, what are the costs, and how are they accounted for; (d) the condition of storage facilities, at what level stocks are maintained and how they are regulated, how phytosanitary treatment is applied and what chemicals are used, what are the costs of storage and treatment, and how they are accounted for; (e) the state of the port facilities and their efficiency and capacity in the handling of cocoa, how cocoa is transported, and loaded on to the ships, what are the costs, and how are they accounted for; and . (f) how ECOMEX negotiates prices with traders, what the terms of payment are, how the invoicing is done, how the funds are credited. Government has agreed to permit the free marketing of cocoa. Under the proposed management contracts with the two foreign firms managing Bela Vista and Uba Budo, each firm would be responsible for the marketing of the cocoa of the plantation under its charge. The study should review each firms' plan on how it intends to market the cocoa from the plantation under its charge. The study should provide recommendations to Government as to how it could monitor the transactions and ensure that maximum benefits are retained by the country. The study will examine: - 62 - Annex 3-5 Page 4 of 10 (a) how the two firms plan to market the cocoa; (b) what arrangement would be most feasible in terms of ensuring that there is no under-invoicing or sub-grading; (c) whether the foreign firms should continue to utilize Government services for transportation, storage and port facilities, and, if so, what would be the appropriate charges; (d) how to minimize deterioration in quality and loss in the internal transportation, storage and port handling; (e) how Government can set up a system of quality control, train people to be supervisors, and ensure that the cocoa exported is of uniform quality, meets internationally accepted norms, and that cocoa in storage is properly fumigated; (f) whether the other plantations and private farmers should sell their cocoa production to the two foreign firms if they offer a better price, than to other competitors including ECOMEX and, if so, how this should be done; (g) the possibility of private traders establishing themselves in STP and the advantages and disadvantages of this to the country; (h) the optimal procedures for financial transactions to maximize actual cash receipts to the country; and (i) any other relevant cocoa marketing issues for STP. Requirements It is estimated that an expert in cocoa marketing would be required for a total of 8 weeks with 4 weeks in STP and the remainder for travel, gather external information, and for drafting the report. Qualifications f At least 10 years experience in cocoa marketing internationally, and experience in all the steps involved in the cocoa marketing process. Lansuages Fluency in Portuguese preferred, otherwise French or Spanish required; English recommended in addition. WAPAD May 1987 - 63 -Annex 3-5 Page 5 of 10 Crops Diversification Summary Background At present STP's economy is overwhelmingly dependent on cocoa which represented about 90% of export revenues in 1985. Food production is principally limited to bananas, bread fruit, palm oil and root crops. There is a small but increasing amount of vegetables grown by individuals with the assistance of a pilot project (Mesquita) financed by the French Aid and Cooperation Fund (FAC). Foodstuff imports accounted for about one third of all imports in 1983, excluding food aid which also represents a third of all imports. FAC has also financed the preparation of an agricultural potential map which has identified the best crops that could be grown in the different ecological regions. A study would be undertaken under the project that would identify potentially profitable crops for STP to diversify into. It provides recommendations to be followed. ObJectives Review and assess the existing situation with regards to the supply and demand of food and cash crop production, both locally and for exports. The study should focus on the following: (a) analyze the existing production pattern in terms of type of culture, production techniques used, and procedures for commercialization; (b) taking into consideration the agricultural potential map, compare existing production patterns with potential ones, and their relative cost of production, and identify those crops with the most potential for development; (c) for those crops identified in (b) above, assess the actual and potential demand for the crops locally and abroad, and STP's comparative advantage in producing these crops; (d) socio-economic consequences of the possible changes in production pattern for the individual farmers. Based on the coaclusions of the abbve analysis, recommendations as to how to proceed with a diversification program. This should include an identification of crops which have potential for savings through import substitution or export earnings and promote them. The study should identify: (a) research and training which will be required to improve existing production and develop new crops; (b) the need for extension service through the Nesquita project, Poto research station, etc; and (c) how to improve marketing potential, both domestically and internationally. - 64 - Annex 3-5 Page 6 of 10 Logistics Organization. The team of consultants will report to the Director of the Planning Department of the Ministry of Agriculture and Rural Development. They will also work closely with the national director of the Mesquita project and the French technical assistance team, the representative of FAC in STP, and the research team from IRCC at Poto. They will keep the Project Coordinator informed at all times of their work plans and activities. Personnel. The study is estimated to require expertise in the following areas: Field work Report writing Weeks Foodcrops agronomist 4 3 Cash crops agronomist 4 3 Agricultural economist (iucl. marketing) 3 4 Sociologist 4 3 Total 28 Starting Date. End 1987. Report. In addition to writing up the findings and recommendations referred to above, the report should briefly identify development projects, indicating project scope, timetable, organization and financing required. The consultant team should prepare a brief report of key findings immediately after completion of field work. A full final report should be be submitted to Government (15 copies) and to IDA (5 copies) no later than 3 months after the initiation of the study. The report should include an annotated bibliography of the existing reports used in the study. The s_lected consulting firm would be required to provide the following within the negotiated fees: external and internal transport, lodging, communication and the report preparation costs. WAPAD May 1987 - 65 - Annex 3-5 Page 7 of 10 Forest Assessment and Woodfuels Supply/Demand Studies Introduction The Government of the Democratic Republic of Sao Tome and Principe hereby requests the assistance of the International Development Association (IDA) In order to carry out a preliminary forest assessment and a study of woodfuel supply/demand patterns, pricing structures and carbonization methods. Background and Justification Sao Tome and Principe (STP) is endowed with a dense and varied forest cover composed of both indigenous and exotic species. On the two islands combined forest and agio-forest is estimated to occupy about 80% of the total landmass of 1,000 Km but no comprehensive forest inventory has yet been carried out. An inventory is required before any land use planning for woodfuel production or other purposes are undertaken. Based on aerial photographs, records dating from Portuguese colonial times and soil maps completed in 1971, present patterns of land occupation are tentatively estimated to be as follows: - humid broadleaved forest 42,000 ha - secondary forest 15,000 ha - agro-forestry formation 24,900 ha Total 81A000A Data on the pattern and level of compensation of woodfuels by households and cocoa plantations has never been collected systematically in STP. Activities of fuelwood dealers are not registered. Charcoal is produced by an unknown number of dealers who are believed to use traditional earth kiln methods. The principal source of tuelvood takes the form of free gathering of wood for which no records are kept. The main estimable sources are from logging and sawmill wastes and woody biomass resulting from agro-forestry clearing operations. Estimates of household consumption of woodfuels have been based upon parameters currently applied to low-income developing countries in the tropics having similar soclo-economic characteristics. No firm data is available on supply networks of pricing and no study of carbonization methods has been carried out. In view of the need to eliminate fluctuations in woodfuel supply and in retail prices in the market place, a study of the supply/demand network is required. In order to make recommendations on improvements in charcoal production methods, data is also needed on current carbonization methods. The cocoa sector uses wood intensively in the drying process. Given the planned increase In production of the sector, it is also important to determine the impact on supply and demand of woodfuels after increased cocoa production, as well as the environmental implications of this process. - 66 - Annex 3-5 Page 8 of 10 Objectives - establish an up-to-date assessment of STP's forest cover (including farm trees); - prepare terms of reference for a forest inventory to be carried out on selected forest areas which are promising for timber and/or fuelvood production; - determine average consumption levels of woodfuels in STP households; - determine average consumption levels of woodfuels per ton of cocoa, and project voodfuel needs based on planned production increases in the sector; - create a meaningful data base on the supply/demand network and pricing structures for use in the planning of future woodfuels supply; - determine whether there are alternative and appropriate technologies for increasing the efficiency of woodfuel use by the cocoa sector; - determine whether there are alternatives to woodfuel for efficient cocoa drying; and - collect data on charcoal production for recommendations of improved techniques. Description of Tasks (d) The forest assessment will: (i) retrieve all existing information on STP forests, including maps, field observations, statistical data from ministries and agricultural ezkterprises; (ii) plot major forest areas; (iii) identify various formations (national parks for ecological protection purposes, reserves, production forest for timber and fuelwood); (iv) draw up terms of reference for a detailed forest inventory described above under "Objectives"; (v) determine rates of deforestation, taking into account the projected increase in demand resulting from growth in the cocoa sector. - 67 - Annex 3-5 Page 9 of 10 (a) The etudy of woodfuels supply/demand patterns, pricing structures and carbonization methods will: -carry out a detailed longitudinal study of about 50 representative households to analyze fuelwood and charcoal input; - carry out study of woodfuel use by cocoa farme; - study production/supply network to determine reasons for fluctuations in supply and in retail prices; - research current carbonization methods and establish feasibility of improved charcoal kilns; StaffIng Requirements (a) A team of international consultant experts will comprise: - one forestry expert/statistician to assess the present status of the forests and prepare terms of reference for selected forests inventory (two man-months); - one social scientist for the household consumption and charcoal survey (one man-month); - one energy planner for the supply/demand study (one man-month); (b) A Government-appointed working group, composed of collaborators from the Ministries of Agriculture and Livestock, on the one hand, and Industry, Transport, Fisheries and Tourism, on the other hand, will be formed. The members of the working group will participate in the work of the consultants and assure the-cooperation of ministries, state enterprises and other concerned agencies. At the beginning of the consultants' field work, the working group will hold a briefing session in STP with all concerned parties and will provide the consultants with any existing reports or information that may be relevant to the study activities. Working group members will also accompany the consultants on their visits to state enterprises and will prepare background reports on enterprises or issues for the consultants as required. The working group will work closely with the consultants durlag the entire implementation period of study and will participate in the discussions of draft reports. - 68- Annex 3-5 Page 10 of 10 Reporting Requirements (a) Forest Assessment The forest expert/statistician will prepare and present a draft report for discussion to the Government and to IDA at the end of the activity. The finalized report will be presented approximately one month later after comments have been incorporated. The report should contain an outline of the input and results expected from the forest inventory to be carried out at a later date. (b) Woodfuels Supply/Demand Study The social scientist and energy planner will prepare and submit a joint draft report for comment to both the Government and IDA at the end of the activity. A final report, incorporating revisions, will be presented no later than one month after the Government and IDA review. WAPAD May 1987 LAO TUHEEPIINCM - 69 - Annex 3-6 PC TOM E 69 Table I co =ACTow Page 1 of 2 Dobt* 4uiofi) 4USS 'CoO) I Total __ 2 Iforeisl 8m Lwcal Forign Totl Local foreign Total Excimm Costs MA9. VISTA t. PNTATION DnEOPNT ILA VISTA 42 354 36 532 4,502 034 St 26 2. FM CROPEMA VISTA 1 11 13 19 142 161 88 1 3. SOCIAL IRTC T MAE VISTA 25 3t 64 315 499 314 61 4 *-ToLeZ BELA VISTA 68 404 472 867 SIU43 6,009 86 31 . PLANTATiON GEOELMPIENT UWA IU3O I. VU PWTATION IEUIIFIOT 49 494 543 624 6.295 691o 91 36 2. FOOD IC. VIAJ I 11 12 10 142 152 93 1 3. SOCIAL INFRASTRjCTH F tisA 25 39 64 314 496 810 61 4 b-total PLnTATNm DKEamP0T UtA l 75 544 61 949 6.s23 7.872 B8 41 . SIIPORT TO AtRICtLTURE SECTOR 1. SIMCULTUC TEOINICAL SUPRT 2 86 se 26 14096 1.123 98 6 2.A RIIWTUA TRANI MUNlf 11 69 90 144 873 1,019 S6 5 3. FM OCROPD kLaIT 10 50 60 128 63 760 83 4 4. OTHER EEAS 3 S0 53 36 641 676 95 4 5. SIIML ES 2 42 4* 30 53V 70 95 3 6. MECT SIMPET UNIT 2 97 59 24 1,109 1#133 99 6 ib-TOt SUPOT To AgRICOLTRE SECTmR 31 384 415 388 491 5.27? 93 29 .1 ASELINE COSTS 173 1.313 1s06 2.204 16,954 19160 98 100 wsical Continmncies 16 102 118 206 1,295 1501 9 8 -,ice Continencies 28 62 90 359 M 1.151 6 6 -1 PRJET COSTS 21S I497 1715 2,768 19.043 21.911 87 114 _ - a a ng SWlVll AMCU COST SUMMARY (Dobra Milli (MUS9 000) Z Tobl Z Foreicn lbm Local Forein Total Lcal Foreim otal Excag Coskt I. ET COM A. CIVIL t01 100 122 221 1.266 1s547 2W913 55 1S 8. AGRICULTURE IIERS 7 140 149 94 1786 t.9 5 10 C. EWEIPHT , VERYIlE FURI AND REPVIR 4 83 97 51 14053 1.104 95 6 0. AGRICULTIRE INPUIS 1t 211 222 141 2.679 2,820 95 iS E. TEOCL ASSISTANCE 146 156 136 1f953 1.990 93 10 F. SmDISUItRD TIIIII - 65 65 - 832 832 100 4 6. PROJECT PREAATION FACM - 119 119 - 1.516 1.116 t1o 8 N. IWUEE COTRACT - 344 344 - 4.95 437S 10t 23 Total INS11UENTT COSTS 133 1,230 1.362 16 15,642 17.330 90 90 II. REOJENT COSTS A. PEUSO 6 - 6 77 - 77 - 0 P. WEAnTos a IInT1ENME 34 103 138 438 1,314 t1752 75 9 Totl RECUET COSTS 41 103 144 515 1354 1,929 72 tO Toal ASEIE COaTS 173 1.333 1.5116 2.204 16.96 19t.60 Se tOO Fsical Contirgncui 16 102 118 206 1295 1t,5 86 8 Price Carknincies 28 62 90 35 M 1.151 69 6 Total OET COSTS 218 .497 1.715 2,748 19,043 2t.8t1 S7 114 VMC= mum z - 2 m annum22 ZERSm UNVURaun a '.w4 t' Pi tw 6 mt oW t t1 US 96 I1836 la'I 111 rn tfg9 m 6SW opgq= woj a1 t r - 9 - - .- a - s -mm =mm m a -rn - M m mm* cmmonss ma m m mmannwn urn mmauw ut 'St vi t 'Itt qut 3 am "13 9s 96 34 ti t 9" dlg 1a3u = u tu ': is t' w * tti os tP t su i UT *e w R Uw we rn we' 103rnw e eo togli a a w at am tt a utt tt tit somv t"IN tecst a'llt t00 St't as so e OJI tail} No zt 0144| #0 t9t K09 S0 in tno1 Yt 9'6 w 3t - - 06 3M at1 tot - 36 6 4t s1111W 9tne1 u? tot =SS a! - 06 9k 30? 13 - 36 331t - 39 mrnwizv swmoa * flI - - - 49 - - - - - 6 1USS4 *0 *o uat - - - - s - - eI - V 3' w i a * 0'0 9U - - - 38 6 t - - - 6 - - UK£118W1934 -201 ' OM 3K5' 111114111 mot VI 06 't 0U t 91 o ot IN 6ol 319 11t , l - E3 Mu11Im * Vo mu't - - - - - - - a -' N - - W U U * 0e 01? 90?'? e9 - - t Ut at - S t - OK '11 31A3961A iUyh '2 °K t * OU 'It - R 1 - - - . e - - 'A I W 3W az roet 491 - la OK - 2 - cajll- a i SO= 31OulMI *5 Oil rot "tot Us it lo am is P " is 1S MM -W 1SI t S314t1ft ' IlMtl '3 13 *4§t gq - - - -1 - 63 - 964 - 609t 13P1AI2 In VW OM 016 du 6" SNPA~~~~~~~~~~~~~~~~~~~~~~~~11 1?ISW IV tg - -m a ma m - m mm mas t - a a w o 1 .OAW z Mo Losi MM OMun, aiu m urn mum imus mu u mu mdmamu m Wmne Lw vine VWSA - 438115~~m 1315 ID1 m 6306 WI1W TMI=m W3UIam ZIUuS? Il is61911 3? 2110111 VW3 IilIo3S 111u3 £21014 WUI1UIUII 3125 0965~~UIMI 31253dl3 Q9VI ~~~~~~~~~~~~~~~0. 1U ~~~~umudm3 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ IO A3RXSdE 'I1U95~ ~~~~~~~~~~~~~~3131 3U 315 CVI tlw SAlO TOE - PRIICIPE co BEAIRLITATI FWECt ESTIMATE C M O CEDIT ISHR1 tW IUW'000) IIA Fr Didbrusot Comolative fegioa ide m Smter by umter Dliburust frofile t2) o. - 1a88 l 1,63 1,$0 0 It 130 1,760 3 1m 1 250 2,010 7 ll 320 2,330 12 5 199 I 450 2,71 19 It it 450 3,230 26 199 1 510 3,740 34 11 64 4,380 43 / / 192 1 580 4,960 51 4 - 11 570 5,530 60 '-/ 19m3 1 570 6,100 U9 11 510 6,610 76 . ." / 1994 1 450 7,060 83 (4 ' ll 4O 7,sl0 Be l19f I O3 7,900 93 2 It 97 19 I too - 100 Mates 1/ IDA Nhtern africa gion profile for perennial O - crop frojects; Septeber 1M. 1909 1009 Ison 1811 1102 1110 1694 liii 1990 IRA Fiscal Years July I - Ju 30. Project rer July I - Jun 30. IDA Fiscal Yea Target Dtes Negotiations Nlay 197. Effetivenss Seteebe 1987. 2V Project profile differs fro region profile becuse of PmF isbrueent of US0 1.5 eillion at credit effectiveness and stat-p activities initiating one ywr before credit effectiveness. WaD 1987 I -- H - V v~c ? r--~lft - 73 - Annex 3-8 Page 1 of 5 SAO TONE AND PRINCIPE COCoA REHABILITATION PROJECT Organizational Arrangements for Project Support Since agriculture and particularly cocoa is an integral part of the economy as a whole. the project activities will be supervised directly by the Minister of Agriculture and Rural Development. He will: (a) set general directions and make recommendations on Government position on policy issues concerning the project; (b) provide guidanta and support to the Project Support Unit in ensuring that Government counterpart responsibilities are timely met; (c) on the basis of reports from the Project Support Unit, monitor the implementation of the project and provide feedback to IDA on the project's impact on the economy; (d) inform IDA of changes in Government policies that would have impact on the project; (e) ensure that the rest of Government is abreast of the project activities; and (f) serve as mediator for the Government if differences occur between project personnel and other Government entities. A Project Support Unit (PSU) would be established. It would be headed by an internationally-recruited project coordinator who would be assisted by a deputy coordinator and at least one support staff to provide accounting and administrative services. The coordinator would also be the coordinator for thet Line of Credit for Eeonomic Rehabilitation and Modernization, according to the terms of reference shown at Appendix 1. The terms of references for the Deputy Project Coordinator at Appendix 2. PSU would be responsible for: -- (a) coordinating and monitoring the implementation of the different components of the project; (b) ensuring that all administrative procedures and requirements for IDA and the cofinanciers are being properly followed (e.g., disbursement requests and accounts are maintained for each component); (c) ensuring that IDA and other cofinanciers are fully informed at all times of the progress of the project through preparation and submission of periodic progress reports and communication of any major changes in the project if and when they occur; - 74 - Annex 3-8 Page 2 of 5 (d) ensuring that Government is informed of the progress of the project through the Minister of 1ADR and facilVtating decision-making when necessary; (e) when applicable, coordinating the procurement process of civil works, goods and services for the different components and ensuring that IDA and cofinanciers' guidelines are properly followed (procurement for the Agricultural Enterprises financed under the projecq would be handled directly by these Enterprises); an4 (f) coordinating the various studies that would be carried out during project Implewentation. WAPAD May 1987 - 75 - Annex 3-8 Page 3 of S ProJect Coordinator Position: Project Coordinator Agency: Project Support Unit Duration: 2 years renewable Reports to: Minister of fgi-tculture and Rural Development (NADR) Functions: He would head the Project Support Unit to be established under the proposed project, and would be responsible for the following: (a) coordinating project activities so that the different project entities keep up to date on project development, thus ensuring complementarity of project activities; (b) monitoring project activities by maintaining a timetable of scheduled activities, and reporting slippages to the Minister of MADR; (c) collating quarterly progress reports concerning the project and preparing consolidated reports to be submitted to ministries, IDA, and other concerned agencies, in addition to other reports which may be issued directly by specific project entities; (d) assisting Government in defining the priorities for studies to be made on the agricultural sector, the elaboration of their terms of reference, and the recruitment of consultants; (e) when applicable, supervising the procurement process of civil works, goods and services and ensuring that IDA and cofinanciers' procedures, where applicable, are followed (procurement for the Agricultural Enterprises financed under the project would be handled directly by these Enterprises); - 76 - Annex 3-8 page 4 OF 5 (f) resolving where possible problems that may arise and affect project implementation; and (g) transfering know-how in the area of project management. Qualifications: advanced degree or equivalent experience in agronomy and/or administration and management of development projects. Experience: at least ten years of experience in project work, substantially in agriculture, preferably with cocoa and including at least five years experience in project management and administration in conditions similar to those in Sao Tome. Languages: Portuguese essential; Eiglish or French preferable. WAPAD May 1987 - 77 - Annex 3-8 Page 5 of 5 Deputy Coordinator Position: Deputy Coordinator Agency: Project Support Unit Duration: 4 years Reports to: Project Coordinator Functions: The deputy coordinator would be appointed by Government and work in the Project Support Unit. He would report directly to the Project Coordinator on all matters concerning the Cocoa Rehabilitation Project. His functions would include the following: (a) assisting the project coordinator in executing the responsibilities of the Project Support Unit (see TOR for the Project Coordinator); (b) undertaking or ensuring the execution of those activities delegated to him by the project coordinator; and (c) substituting the project coordinator in his absence. Qualifications: Technical degree in Agriculture desirable. Extensive knowledge of public administration and laws in STP required. Experience: At least five years in public sector management and administration related to agriculture. Must be familiar with Government administrative and legal procedures and with dealing with senior Government officials. WAPAD May 1987 THIS PAGE IS BLANK SAO TOt£ AND PRINCIPE CDCOA REHIIlLITATION PRWECT COCOA PRICES ICONSTANT 1986 PRICES) 1986 1987 1998 1909 IO 1991 1992 1993 1994 1995-2011 Cacao CIF aj USSIton 2,090 2,040 1,940 1,890 1,C.40 1,084 1,898 1,912 1,926 1,940 Less Landding Storage I50) (50) (50) (50) (IO) (50) (50) (50) (50) (50) Less ICCU Levy fUSS.01Ilb) 124) (24) (24) (24) 124) (24) (24) (24) 124) (24) Less Freight t Insurance (115) (115) 1115) (115) 4115) (115) (115) (115) 1115) (115) FOR Sao Ivte US$Jton 1,901 1,951 1,751 11701 1,691 1,695 1,709 1,723 1,737 1,751 ft4q 149 146 130 134 132 133 134 135 137 139 Less Port fandling/Storage (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) = 147 143 135 131 130 131 132 133 134 135 Less Direct Tax bj q.9% (15) (14) 113) (13) 113) (13) (13) (13) 113) (13) Less Senera] Duty 1% (1) H1) (1) M (1) 11) (1) 11) (1) (1) Less Agric Tad 6Z 19) (9) (B) (8) (8) tO) (8) I8) (8) (8) Less Agric Contribution 2% (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) .1 Less Transgort from EEA t) Port (1) J () (1) (1) (1) (1M (1) (1) (1) Less Coonission (3) 13) (2) (2) (2) (2) (2) (2) (2) (2) Faregate C / 59 115 108 105 IO4 105 106 107 108 109 Faregate Ewcluding taxes 143 139 132 128 126 127 128 129 130 132 a S World Bank haif-yearty revisoio of Comodity Price Forecasts - September 1986 b_I Percentage over FOE prite increases pcrt handling charges c; Erowex's fixed prices avernged 54sftO1Dl/ton it 195i (65DB/kg for prisary grade and 45DB/kg for secondary grade Note: Totals co not add due to rounding. WAPAD February 1987 I I I wcj cr1 1Krc~~0 < I-" I~ -u< U F 1 - >0 cr' m H 1~~om . - aMgusu wm s SS'01) 95 udit ou 2 a1 nos tw NM3 aoot nus Is" io 19s IM,o aIv sw it" 206 Coco him (low) 552 _2 W4 Ms 1233 1310 341i an 155 UN "1 16 15 1525 eat1 Pw1t (aft.: As. Tagas II5 3.08 in5 30a us 100 I01 in we6 lO 1 me6 weS salca f s6,441040 048 S,4 1*323,23 2,5 151.856 3*,40 16,06 134*ft*3 1,7325 130*001 2d00,66 UI,730 ----- -*-*- - - - - - ----- -- 0- hzklt.al .ki. 2,921 33,925 14,390 23.259 25,935 2331 33,161 23,3 23,11 21.16 21,311 s1.1 21,161 33.311 Naiate. .o wa.lamtuu Mu 5,449"t 1,40 10," 05 95"s 1SOu 10,2" 032 1,W Isom 323 Isom 1,6 A90Ialat adh O0mal 0,500 6,506 ,m0 #O*. SIM, o,ou0 sOw ,oow000 J A no I'om 1'm 1,69 3,000 lb _ 26,6n 10,"2 3,13s nos" "5,m ","I ,seo ss,80 2A"1 23,22 23,0 VA"0 "00o 2 total ?lt1 ants 51.4 2,060 53I92som 3,5 0955 ", 3 ,011 3, n,00 2,3 5,3w 4,4S 4,3w n., ,201 amlows 12,o61 10401 3441 45,01 56,33 30,o2 38,s6 wow5 95m2 95,2v mom20 932 -1,202 w,ur lWi_*d 2314 zon ,a "OM* m,S.. .. .in n n70 .mom in o "on? O,U,f U U,JM *a*UaU a *b 0 us 0 0 0 a 0 0 0 0 a 0 0 OlemI, *W. tam ass. h60mth 11,40 22,M3 5,0m 2093 Mom 32,3t 2,40 0,1 V3,90 s,3 "03 3533 35,254 #3 html A. FimIal CosA#, tam a6 1mn,s i 6 m9 1- lat1 me n,2t dam. b4cm (a) it W" 'm=il 1am all ,555 *imel b7 ta,mfsssS ,1. thedo oW appn (4) 10.: 1.i at I ssoI W0 1mm tm to laIa 4u35932s3 (e) dspmlat08a cml Ie eelcula fou ml i _ut a *L t e ma _ m ___usd _ i_o 1901# bee..* tunam to- e loo a=s., dspmiati CWMe! a* In he cooI Elm alYala. 3. All satftast On In OOM&mt I900 petes. this pamlatim iat,,ss W0 d1.towtb.a is this uwosths ,tmme (a) welatlue mIaigiN of wow. pdea am. td late Lato ihat mgw-1 m.s la e.astmt 08m5 MO9 (4) llast 08 a. dtbi s "wes . am u - mim SW mmm - u n _s _ as us us u ws ui ts -9 u@*sa aa ns se ui us us u -ea Pob hm qpmu9sn _ "fe, s a,m u,m s,m 1,5"s now n, Vs1 349a6 now m,a nA0 n6,4 345 u n m -* * 0 o * * * * * g * * * b_W hm _ 3U3m "-3,31 5.5 U m *,"m Is.5 0 ; "-#M "-33 7aw 0 i mob= 3iinS1a ou15 * 33*4 "An4 f WIR *,M 0 0 0 baisIUsft Qpi 4613 S 6 0 0 0 0 0 0 0 0 S S S cmu"" PSum Imdom %Wr S "1.M 5.53 3,933 31,40 UA,W6 suS.1 won*5 331,0 34.61 39,34.5 40 9.915"#A _ t_F 8 "$.M m w &% " "An .w MA mm W, .A WA $W mA * ftmp_nt Fft mom man, wim mAn6 6n U u n i n in U m m . me bw---- -_ - _ ft Cm O _n noees imom" o5 a 301,403wi mo 40.3) 3A36 3,8m33.3 1353135n 8.694,5 n1,650 n31 3.13.1 opus ~~~~~~~~ nes =A _oo uhm UgA n,n mam 4w uAnF mA ohm busoNmn "M gm 3_.1 MAW "Am 3,61 .9 MAW M,1 ,4M 3o5 31 335 331 emu MA3 _D #p U, tUJs§ta momw W. &m (o) u-m m * t lb a_. 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